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By Steve Slater and Huw Jones
LONDON, Oct 24 (Reuters) - Britain's regulator told banksthis week they must use a stricter measure of how they measurecapital under a health check of lenders that will be released onSunday, people familiar with the matter said.
The European Banking Authority (EBA) is assessing how 123European banks would cope under a recession scenario and willrelease its findings of their capital strength on a so-calledtransitional basis.
That varies by country, depending on the pace they areapplying the global Basel III capital rules that have to befully in place by 2019. The methodology used is importantbecause it could make a significant difference to findings ontheir capital ratios.
Britain - which is implementing Basel rules earlier than theglobal guidelines - has told banks they must use the method theycurrently report under, which is effectively the full Basel IIIrules, four industry sources said.
The Prudential Regulation Authority (PRA), part of the Bankof England, had previously told banks to report results on theless strict transitional basis "in order to improvecomparability and consistency across EU firms." (http://www.bankofengland.co.uk/financialstability/Pages/fpc/capital.aspx#)
The PRA declined to comment. The EBA said it made clear inApril that transitional capital rules should be the "current"rules in place in each country.
Reporting on a minimum transitional basis and the full BaselIII basis could alter capital ratios by up to 1 percentagepoint, analysts said.
"When banks compare themselves against others they willpoint out the different treatment in national criteria. If someof the UK banks lose 100 basis points because of transitionalarrangements that are not being applied to others, that is afair point," said Fernando de la Mora, head of consultancyAlvarez & Marsal, based in Spain and Portugal.
MOST INTERESTING NUMBER
As well as the headline transitional numbers released by theEBA, it will release a "fully loaded" capital number for eachlender for comparison purposes.
That will be the most interesting number for comparisons,especially for the big banks, de la Mora said.
The phasing of Basel III rules is a complex issue thatincludes how banks make deductions to capital for deferred taxassets and intangible assets.
The EBA is coordinating the test but national authoritiesare overseeing the process.
Analysts expect all Britain's banks to have common equityequivalent to 5.5 percent at least of their risk-weightedassets, as required to "pass" the EBA healthcheck. But there islikely to be scrutiny on banks whose capital is only slightlyabove that target.
Four British banks are taking the EBA's test - state-backedRoyal Bank of Scotland, along with HSBC, LloydsBanking Group and Barclays.
The PRA is conducting its own UK stress test, which coverseight banks and building societies and includes a more adversescenario for the UK economy and house prices. The results ofthat test will be released on Dec. 16. (Editing by David Holmes)
