Nationwide makes deal on capital

NationwideNationwide has secured vital breathing space after striking a deal with a City watchdog to bolster its finances by the end of 2015.

Britain's biggest building society said it can meet the Prudential Regulation Authority's (PRA) demand for it to strengthen its leverage ratio - a key measure of financial strength - to 3% from 2%, without raising extra funds from investors.

The PRA recently ordered Britain's five biggest lenders to raise another £13.4 billion to plug a higher-than-expected £27.1 billion hole in their finances. Nationwide was told it must raise another £400 million in capital.

That prompted fears over an accelerated deadline and speculation the Nationwide could have to raise more than £1 billion in buffer capital.
Nationwide had criticised the leverage ratio - a simple calculation which measures a lender's capital as a percentage of its assets - as a "crude" measure.

Barclays, which was told to improve a 2.5% leverage ratio, also criticised the measure and said it would hit the target by 2015, adding any move to speed up this process could force it to squeeze lending.

The building society said: "Nationwide's plan does not require capital issuance and is consistent with the society's current business model and strategy."

Regulators are keen for lenders to strengthen their balance sheets to provide a buffer against future financial crises. The PRA had not set a public target on when the tougher measure must be hit, but banks believed it was likely to be accelerated. Those fears were heightened when PRA board member and deputy governor of the Bank of England Paul Tucker recently said the tougher leverage ratio should be introduced prematurely.

The Nationwide did not say how it will bolster its leverage ratio, but it is likely to involve retaining earnings. The company added it could meet the target sooner if it chooses to issue deferred shares, a new instrument for the mutual sector.

A PRA spokeswoman said: "The PRA has required Nationwide to increase its leverage ratio to 3% by the end of 2015 after taking account of the capital adjustments set out in our statement of June 20, and has accepted Nationwide's plan for achieving this. Discussions with Barclays are ongoing and we expect them to conclude by the end of July in line with the PRA board statement."