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Banks need capital in local subsidiaries, says PwC

PriceWaterhouseCoopers has warned that banks must hold capital in their international subsidiaries to cushion any future failures.

The auditor, which is currently the European administrator of Lehman Brothers, made the comments in its six-month report into the bankruptcy proceedings of the investment bank. It reported that it has already returned 46 per cent of client’s assets, totalling £8.19bn.

PwC, which has so far charged more than £77m in fees over the last six months for 234,578 hours of work, says the book value of Lehman’s gross assets was £422bn but gross liabilities was £410.8bn, giving an equity buffer of £11.3 bn. PwC says whilst this appears to be a significant equity cushion, it represents just 1.3 per cent of the gross book value of market positions and an even smaller proportion of nominal outstanding positions.

As a result of the work done so far, PwC says there has to be regulation put in place to stop this sort of complicated bankruptcy ever happen again. PwC joint administrator Steve Pearson told the Financial Times: “You’ve just got to have some assets held locally that you can rely on.

“We walked into this one with no one we could turn to. It wasn’t a UK regulated bank; there was no bailout fund ready. Holding local liquidity plus having regulatory facilities would have made a lot of difference.”

The administrator admits the process of winding down the Lehman Brothers book could make this the longest bankruptcy proceeding ever: “The administration of Lehman Brothers business is exceptionally complex.

“Over the coming months, we intend to explore the alternative mechanisms for distributing realisations to unsecured creditors. We caution, however, that it is likely to be some time before a dividend is paid to unsecured creditors.”

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