New Bank of England leverage ratios welcomed with open arms

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By 2019, UK banks will have to hold a maximum of 4.95p in capital for every £1 they lend, according to new proposals released today by the Bank of England (BoE).

The figure, which is only a small step up from the 3% already asked of the biggest British banks, adds on a supplementary buffer of up to 1.05% and a countercycle buffer of 0-0.9%, taking the top ratio up to 4.95%. Precise figures will be worked out based on the size of the institution, as well as other factors yet to be confirmed by the BoE’s Financial Policy Committee (FPC). A review scheduled for 2017 will decide whether smaller banks will now be asked to meet the 3% minimum capital imposed on larger banks.

The new ratios are smaller than anticipated and the markets responded enthusiastically this morning, with shares at RBS, Lloyds and HSBC all increasing, and Barclays’ shooting up by nearly 10%.

Lloyds’ leverage ratio has already been brought close to the maximum at 4.7%, while Barclays is currently 3.5% and RBS’s stands at 3.9%. Investec analyst Ian Gordon described the BoE’s proposals as “eminently manageable”

In a letter to the treasury, Mark Carney, governor of the BoE, said: “The committee believes that its proposals for the design and calibration of the framework will lead to prudent and efficient leverage ratio requirements for the UK financial system.

 

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