RBS feels pinch as UK regulator steps up pressure on banks

LONDON, Feb 28 (Reuters) - Royal Bank of Scotland set aside extra money to cover future losses and assessed theriskiness of its assets more prudently, showing tougherregulations are biting for Britain's banks.

RBS will need more than 4 billion pounds ($6.1 billion) morecapital to answer pressure from Britain's financial regulatorfor it to hold a bigger buffer against potential risks.

The Bank of England's Financial Policy Committee (FPC)warned in November that it was assessing whether banks had setaside enough for potential losses and was concerned that bankscould be "gaming" their risk calculations.

RBS took steps to shore up its capital position when itpresented its 2012 results on Thursday, saying it would sellpart of its U.S. business Citizens and shrink its investmentbank to improve capital in the next two years.

"Clearly pressure from the FSA to shore up its capitalbuffers has forced RBS to announce more restructuring which islikely to further dilute the future returns potential at RBS,"said Shailesh Raikundlia, analyst at Espirito Santo.

RBS CEO Stephen Hester said RBS and other banks had workedwith the Financial Services Authority on the FPC's concerns.

"The FPC has concerns about provisioning across banks so wehave put our thumbs on the scale and provisioned hopefully quiteconservatively at the year-end to address that element ofregulator concerns," Hester said.

"We believe we have answered to their satisfaction."

RBS said bad loan losses had continued to fall last year,but lifted its loan impairment provision to 21.3 billion pounds,from 19.9 billion a year before, to increase its coverage ofrisky loans to 52 percent from 49 percent.

Another key focus of the FPC, which looks out for troublespots in the financial system, is how banks assess therisk-weighting they attach to their assets amid concern thatinternal models are too complex so banks are underestimating howmuch capital they need.

RBS said the tougher UK stance added 44 billion pounds toits risk-weighted assets (RWAs) in 2012, including a 12 billionincrease due to higher estimates for corporate loans.

It expects a further increase of 10 billion to 15 billionpounds early this year. That means RBS will need to hold 4.3billion pounds more capital to cover the RWA increase since thestart of 2012, based on an 8 percent capital ratio.

Barclays has already shown the impact of thestricter regulations and Lloyds, HSBC andStandard Chartered are expected to follow when theyreport results in coming days, before an FPC report late nextmonth.

RBS and Lloyds are under most scrutiny, as analysts say theyhave less of a capital cushion than rivals.

RBS said despite the regulations it cut its RWAs by 58billion pounds to 460 billion, helping its core Tier 1 capitalratio increase to 7.7 percent, based on Basel III capitalstandards.

It expects that to rise to near 9 percent this year as itcuts another 20 billion pounds of RWAs from its investment bank.