The PRA is currently in discussions with banks on the issue of capital and recently revealed that the UK banking sector has a £25bn capital shortfall.
However following discussions with the PRA the bailed out banks were both told they would be able to raise their shortfalls through retained profits rather than equity sales.
Speaking at the Society of Business Economists Annual Dinner last night Bailey said: “Within the past two weeks, you will have read that RBS and Lloyds now have plans to make good their capital shortfall without raising new equity.
“Some commentators have written that this means RBS and Lloyds have been let off the hook. I have to tell you that is not true, it was always envisaged that both banks would achieve their capital enhancements by restructuring their balance sheets without reducing their lending to the UK economy.
“Moreover, both of those institutions have come a long way from their original business plans and are consequently much safer thanks to FSA and now PRA pressure.
“These banks have agreed to do what we have asked and we will hold them to that. This is a regulator’s promise.”
Bailey also answered critics who claim that the PRS’s capital requirements could stifle consumer lending.
He said: “I want to reassure you that these recommendations will not lead to lower bank lending.
“Capital is not money that has to be stashed away for a rainy day. Essentially, it is the shareholders’ stake in the company.
“In non-financial companies, shareholder capital or equity is used to finance the acquisition of assets. The same is true for banks. Equity finances the provision of loans to households and companies. In that sense, additional capital supports lending by banks and does not substitute for it.
“In asking banks to have a larger share of equity on their balance sheet we are for the most part dealing with legacy issues.
“The whole point of this exercise is to move more rapidly to put the past and its problems behind us.
“This emphasis on legacy explains why it is possible to want more capital to back old risks while easing the capital requirements on new lending to the real economy. Frankly, this is about convincingly putting the past behind us.”
