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The great U.K. bank capital probe puts heat on Royal Bank of Scotland. The Bank of England warned on Nov. 29 that the domestic banks it regulates may not be setting aside enough to deal with future losses. Making definitive judgments about who this affects isn't easy. RBS won't be the only to attract attention. But the state-dominated lender could well find itself fielding some of the first questions.

Take RBS's commercial property loan book. At £66-billion ($105-billion), it's more than double the size of the £30-billion of real estate assets held by domestic peer Lloyds Banking Group. But RBS only holds £9.5-billion of provisions against its book – just over 14 per cent. Lloyds's provisions cover over a quarter of its holdings.

That doesn't mean RBS is definitely underprovisioned. Lloyds' painful HBOS legacy meant that as of June it had suffered an incredible 92-per-cent impairment rate on its Irish property assets, of which provisions covered 68 per cent. RBS's Irish damage – a 73-per-cent impairment rate and a lower 55-per-cent coverage rate – may just be because its assets are of a better quality.

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Yet RBS's own disclosure hardly inspires hope. Over a third of its overall property exposure – £23.7-billion – are very high loan-to-value assets that have defaulted, and it's not yet certain the allotted provisions will cover the ultimate losses. If RBS had to hold the same level of provisions as Lloyds it would need to find another £10-billion, according to Mediobanca.

The Bank of England isn't only interested in banks' suspect property assets. Its latest Financial Stability Report (FSR) also frets that the loans made by U.K. banks to vulnerable euro zone countries carry lower provisions than those held by the states' own domestic banks. If loan quality is the same – which, again, it might not be – then U.K. banks would need another £15-billion in provisions, the FSR says.

Given that the U.K. taxpayer holds a 81-per-cent stake in RBS, the temptation may be to sweep these issues under the carpet. One way or another the U.K. Treasury would have to pick up the bill and U.K. debt remains uncomfortably high. But now the central bank has dropped its bombshell, any banks that have been fudging their provisions will have fewer places to hide.

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