UK banks to issue new equity for bonuses Britain's big banks are issuing an aggregate £2.7bn of new equity to fund staff bonuses and other pay-outs after pressure from regulators to keep capital levels high. Traditionally banks have funded a large proportion of employees" share-based bonus pay-outs by buying back stock in the market and redistributing it to staff. But at the urging of the Bank of England's Financial Policy Committee, which aims to ensure stability across the banking system, the banks are issuing new stock, diluting current shareholders slightly. That strategy means that close to half of total bonus pay-outs are being funded out of new equity, helping to preserve capital buffers. All the UK's banks have core tier one capital ratios - a measure of financial strength - of more than 10 per cent, among the highest in Europe. As banks have lifted the proportion of overall pay being distributed in shares, rather than cash, to comply with European rules, it has become particularly important that distributions do not eat into existing capital, regulators have argued. That is especially important during the current transition phase to new tougher Basel III capital rules, they say. The FPC's requirements - policed by the Financial Services Authority - have led to some hostility within the banks, though ultimately there have been no holdouts. HSBC raised £1.7bn of new equity a fortnight ago in a so-called block trade to fund $1.2bn of stock-based bonus pay-outs and a further allocation, estimated at $100m-$200m, of cash bonuses. Barclays is taking a similar stance, with a plan to issue £600m of stock to fund all deferred stock bonus bonuses, equivalent to about 90 per cent of total share-based pay. At part-nationalised Lloyds Banking Group, which has far fewer highly paid investment bankers, £236m of new shares will be issued, with a further £170m to be issued to cover the payment of hybrid debt coupons. A three-year bar on interest payments on the hybrids - imposed as an EU state aid penalty - has just expired. At Royal Bank of Scotland - 82 per cent owned by the government - overall bonuses were limited to £785m, half of the amount in its investment bank, following intense political pressure. Only about £130m is being paid in stock, which the bank said it had in reserve as a result of new issuance last year. One bank chief said there had been "a lot of pressure" exerted by the FSA, after early resistance to the idea from some senior bankers. "This is not a battle that it would have been remotely entertaining to get into," said another. A combination of political and regulatory pressure led all the banks to impose limits on the level of cash bonuses for staff. Such payments normally eat directly into profits that might otherwise be retained to build up capital reserves. The two part-nationalised banks had cash bonus limits of £2,000. Barclays paid cash only up to £65,000, while at HSBC cash bonuses in excess of £50,000 were funded with new sales of equity.