BOE Sets 4.05% Bank Leverage Rule in Push to Ensure Stability
Oct. 31 (Bloomberg) — Britain’s biggest banks will be hit with a basic leverage ratio of just over 4 percent as regulators push on with plans to strengthen the financial system from shocks.
Lenders must meet a minimum level of 4.05 percent from 2019, rising to 4.95 percent depending on an additional countercyclical buffer intended to cool excess credit or balance-sheet growth. The Bank of England made the proposals today and Governor Mark Carney said the new framework “protects and improves financial stability.”
Global regulators turned to leverage ratios, the minimum of core capital banks must hold without weighting loans for riskiness, as part of efforts to shield the financial system. Their hard line on banks has come in the wake of the 2008 crisis that triggered a global recession and from which many economies are still trying to recover.
The U.K. leverage ratio is based on a 3 percent minimum for all banks, plus a 1.05 percent supplementary buffer for systemically important lenders. The BOE can then add on as much as 0.9 percent as a response to growing risks in the system.
The basic requirement must be made up of a minimum of 75 percent of common equity Tier 1, with an option for banks to make up the remainder with additional Tier 1 instruments. The leverage buffer above the 3 percent must entirely consist of common equity Tier 1.
Key Reforms
Chancellor of the Exchequer George Osborne said he accepts the recommendations of the BOE’s Financial Policy Committee on the ratio and plans to introduce legislation for the panel.
“Reform of the U.K.’s financial-sector regulation and a strong and stable financial system are key elements of the government’s long-term economic plan,” he in a letter to Carney published today alongside the new rules.
Some banks have already signaled concern before today’s announcement. At Lloyds Banking Group Plc, the U.K.’s biggest mortgage lender, Chief Financial Officer George Culmer said the measure “will have an immediate impact, one would have thought, on pricing” of products such as home loans.
The BOE said today that the levels of capital increase implied by its leverage ratio, as well as the impact on individual firms, will be “modest.”
The proposals “will not have a detrimental impact on aggregate credit creation for any sector of firms or segment of the lending market,” it said.
In the U.S., regulators announced earlier this year that they would force eight banks including JPMorgan Chase & Co. and Bank of America Corp. to meet a leverage rule that surpasses Basel plans, forcing them to hold capital equivalent to 5 percent of assets. Swiss authorities require a ratio of at least 4 percent by 2019.
The largest Dutch lenders, including ING Groep NV and ABN Amro NV also have to meet a leverage ratio of at least 4 percent by 2018.
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Oct. 31 (Bloomberg) —
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To contact the reporter on this story: Ben Moshinsky in London at bmoshinsky@bloomberg.net To contact the editors responsible for this story: Fergal O’Brien at fobrien@bloomberg.net Edward Evans
