UK banks sitting on £40bn of undeclared losses

Britain's banks are sitting on a £40bn black hole of undeclared losses that are preventing them from making vital loans to businesses and households.

By Philip Aldrick:

PIRC, the shareholder advisory group, has analysed the 2011 accounts of the UK's top five banks to calculate how much they expect to write off as bad debt in the coming years but have yet to take against profits.

Royal Bank of Scotland (RBS) was in the worst condition, PIRC found, with £18bn of undeclared losses that would wipe out more than a third of its capital buffer and potentially force the 82pc state-owned lender back to the taxpayer for another rescue.

HSBC had ($16bn) £10bn in undeclared losses, Barclays £6.7bn, Standard Chartered $3.6bn (£2.3bn) and Lloyds Banking Group £2.9bn. PIRC presented its numbers to all the banks and said none disputed them.

Profits at Britain's lenders have been flattered by controversial international accounting standards introduced in 2005 that prevent companies from provisioning against potential losses. The rules have been attacked by the House of Lords, among others, as deeply flawed.

PIRC said the rule was "masking the true position [of the accounts] by including fictional assets and fictional profits".

Dividends and bonuses are being paid out on inflated profit numbers, it added, when they should be retained to boost the banks' capital cushions.

Tim Bush, head of governance and financial analysis at PIRC, claimed the undeclared losses meant banks have not been clearing their balance sheets of bad debts and releasing the funds to support viable businesses and households.

"The scandal is the fact that banks are delaying de-risking and de-gearing due to the accounting standards," he said. "The funds are being tied up, rather than being put to work elsewhere."

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