Bank of England Ponders Enhanced Leverage Ratio

The Bank of England (BoE) has suggested that from 2019 the UK’s major banks should set aside more capital than planned under global rules being drawn up to prevent a repeat of the 2008 financial crisis.

Launching a public consultation on a new leverage ratio, the BoE said many financial institutions (FIs) may have to comply with a requirement to set aside funds on top of a proposed global minimum of 3% percent of their capital.

“There may be a case to introduce a supplementary leverage ratio component to a subset of firms, for example ring-fenced banks and/or systemically important institutions, whose failure would be most destabilising for the financial system,” the BoE stated in its consultation paper.

This would cover most UK banks as they have already been deemed to require a ring-fence of extra capital to protect depositors, hold extra capital because of their size, or both.

The BoE proposes two types of supplements; a permanent one for some lenders and a temporary one to cool credit booms. Some banks would have to comply with both in certain circumstances.

The UK’s ‘big four’ banks of Barclays, HSBC, Lloyds and Royal Bank of Scotland (RBS) are already required to meet a 3% target, forcing some to raise more capital. Although BoE governor Mark Carney has previously said that 3% might not be high enough, the consultation paper did not propose any specific figures for what the leverage ratio, including any supplements, should be.

Global banking regulators on the Basel Committee for Banking Supervision (BCBS) have agreed to introduce a leverage ratio for banks across the world from January 2018, and the BoE will use the committee’s definition of a leverage ratio for supplements.

Basel is not due to agree on the level of a leverage ratio for the industry worldwide until 2017, and it will be enforced from January 2018. Opinion differs among its members over whether 3% is high enough.

The US Federal Reserve has already insisted on a leverage ratio of 5% and above for US banks, and investors may want to see that other global banks are equally strong.

The BoE’s consultation period is due to run until 14 August and a final review will be published in November.

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