Shares in Legal & General fell by almost a third yesterday amid fears that it might need to top-up its capital reserves by as much as £2billion.
Legal & General shares recovered this morning after the bank issued a statement to clarify market speculation about its stability, and said that it is injecting a further £650million into its capital reserves, which will then total £1.2billion.
The bank has decided that "in the light of the current economic environment" it is "appropriate to reserve on a more prudent basis" and has therefore moved to "take additional reserves against anticipated risk of a short term rise in credit defaults."
L&G said that to make the decision, it took into consideration a sector-by-sector review of its business, and its default experiences from the recession of the 1930s and subsequent periods of economic turmoil.
"On the basis of this analysis, we have decided to increase credit default assumptions for the next four years from our long term assumption of 30bps per annum for corporate bonds to approximately 130bps per annum" before tax, Legal & General said in the statement, which is equivalent to a further £650m in credit default reserves, which will take the bank's total reserves for defaults its annuity portfolio to £1.2bn.
"In our judgement these increased reserves are both prudent and appropriate to cover all reasonably foreseeable circumstances." the bank said. "We have worked closely with the Financial Services Authority and have kept them fully informed of our approach."
Sources close to Legal & General
told the Times that while the bank is increasing its reserve levels, it is not in "rights issue territory", but one analyst retorted that "despite the company's reassuring noises, the market just doesn't believe it."
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