Banking Woes

LONDON (Reuters) - Big domestic banks need to raise as much as 750 billion pounds in the next three years to support balance sheets and liquidity as the government prepares to wind down support for the sector, analysts said.

The banks have shown they can stand on their own feet in the bond markets over the past year, raising billions of euros without any government backing.

Lloyds (LLOY.L), for example, has just done its first covered bond, a key bank funding tool, which attracted more than 2.5 billion euros (2.3 billion pounds) in orders from investors. <NEW/EUB>

But the sheer size of the banks long-term funding needs raises questions about whether they can do it unaided.

"It's presumptuous to assume that the support used 12 to 18 months ago is not needed now when there is a lot of refinancing that needs to happen," said one financial institutions banker at a European investment bank. Bankers and analysts have said it is unlikely the government will want to extend the Special Liquidity Scheme (SLS) and Credit Guarantee Scheme (CGS) used to support banks through the credit crisis, given the United Kingdom's already massive budget deficit.

Lloyds and Royal Bank of Scotland (RBS) (RBS.L), owned 41 and 84 percent respectively by the government, have said they would shrink their balance sheets to cut funding demands.

"Shrinking a balance sheet will obviously reduce the funding needs. Market scepticism is around how quickly this can be achieved," said Mike Harrison, banks analyst at Barclays.

Credit Suisse analysts have estimated UK domestic banks -- Lloyds, RBS and Barclays (BARC.L) -- would have to issue 420 billion to 750 billion pounds in wholesale long-term funding over the next three years to maintain existing balance sheets and meet new liquidity regulations.
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