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Santander reveals cost of British banking burden

Source: Reuters - Fri 29th Apr 2011

Spain's Santander SA revealed the cost of tougher bank regulations on Thursday as its British arm suffered a 130 million pound hit in the first quarter alone.

Banks around the world have complained that profits will be cut as a result of having to hold more capital and liquidity, extra taxes and other moves aimed at making the industry safer, but few have so far detailed the impact.

Santander said profits for its UK unit would have been up about 20% on last year if extra regulatory costs were stripped out, rather than the 5% fall it reported.

That would have seen profits top 700 million pounds, rather than the 572 million reported, the eurozone's largest bank said as it posted a near 5% fall in first quarter earnings.

"The decrease has been driven by increased market funding costs and the costs of holding higher levels of liquid assets as a result of new regulatory requirements," the bank said.

Global banking supervisors have told banks to hold more capital and want them to hold more liquid assets, such as government bonds or cash to prevent a liquidity squeeze at a time of stress. But new rules won't become mandatory until 2015.

Britain is tightening the screw earlier - mindful of the liquidity crisis at Northern Rock in 2008 - and its banks have been amassing cash and bonds in advance.

As a result, Santander's UK arm is holding about 40 billion pounds of liquid assets, compared to 10 billion at the start of 2010. Barclays' liquidity pool, or surplus liquidity, was 154 billion pounds at the end of last year, up from 43 billion two years earlier. The cost of its liquidity pool in 2010 was 900 million pounds, up from 650 million in 2009, it estimated.

These safer and more liquid assets pay lower interest than other assets banks would have held in the past. Banks also have to replace medium-term funding as it hoards the extra liquidity.

Much of Santander's cost in the first quarter will not be repeated in future, but the impact of extra liquidity has been steadily rising. Liquidity costs cut gross income at its UK arm by 18 million pounds in Q1 2010, rising to 74 million in Q3 2010 and hitting 118 million in the latest quarter.

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