George Osborne is calling on the Bank of England to consider the impact on lending to business and households as it toughens the regime to bolster the financial strength of the banking sector.
The Bank of England wants major banks to be subjected to a regulatory regime intended to prevent them hiding the risks they are taking when granting loans to households and business.
In a much-anticipated announcement, the Bank of England is requiring the biggest banks to hold 3p of capital for every £1 they lend out by imposing a 3% leverage ratio across the industry almost immediately.
The leverage ratio – a way of measuring the financial strength of banks – does not allow banks to make assessments about the risks they face, unlike the capital ratios which allow an assessment of risk to be made.
Threadneedle Street’s financial policy committee will consult next year to impose an even higher leverage ratio on the biggest banks – such as Barclays and Royal Bank of Scotland – which could push the level up to just above 4% from 2016.
On top of this there could also be another component to the leverage ratio which could push the maximum leverage ratio to 4.95% if the Bank of England thought the markets were becoming exuberant.
George Osborne, who had asked the FPC to conduct the review, said that he “fully accepts” the logic for an extra component to be added to the 3% level.
But he said more work needed to be done on understanding what the impact might be on banks and large building societies.
He said the FPC’s new consultation on imposing any extra layer to the ratio should look at “levels of lending to the real economy, the degree of competition in retail banking”, the impact on lenders with low-risk models and “the maintenance of a diverse set of business models in the banking industry”.
In a letter to the chancellor, Bank of England governor Mark Carney said: “The FPC believes that is proposals for the design and calibration of the framework will lead to prudent and efficient leverage ratio requirements for the UK financial system.”
Publishing a complex series of formulas for the banking sector, the central bank played down the impact this would have on the cost of borrowing for consumers – at least for those taking out small loan to value (LTV) mortgages; in other words, those with large deposits.
“The leverage ratio is not expected to be binding capital constraint on the majority of lenders, which might suggest that the effects, if any, on pricing in the wider market for low LTV mortgages, are likely to be quite small,” the FPC said. It did it concluded that some banks would need to be subjected to a tougher regime in some circumstances.
“The committee noted that peak losses of most UK banks during the crisis would have been absorbed by capital if a leverage requirement of 3% had been in place.
Some firms lost more, however, and for the FPC it was important – particularly for the largest firms – that they were viable after sustaining losses so that they could continue support lending to the real economy – ie having enough capital to only cover losses was not sufficient,” the FPC said.
The committee was concerned that too high a leverage ratio would have encouraged mortgage lenders to adopt riskier business models. In the US firms need up to 6% and 4% in the Netherlands.
The leverage ratio is going to become “an integral part” of stress tests and in future in will be part of the annual health check of banks. It does not allow banks to try to hold less capital by measuring the riskiness of assets.
The committee judged there was a strong financial stability case because the UK banking sector is five times the size of GDP. So it will be introduced “as soon as practicable”. “There was a strong financial stability case for introducing this framework for systematically important banks ahead of an international standard, “ the FPC said.
The independent commission on banking, chaired by Sir John Vickers, recommended in 2011 having a leverage ratio of 4%, allowing banks to borrow up to 25 times their assets, although this was not immediately adopted. The high-street banks have been taking steps to improve their leverage ratios.
Lloyds Banking Group, for example, has reached 4.7% compared with 3.8% at the end of last year while Barclays – forced to embark on a cash call last year to bolster its capital levels – has reached 3.5%. Royal Bank of Scotland’s has reached 3.9%.
Lloyds’s finance director George Culmer said on Tuesday that he expects the leverage ratio to “begin with a 4” and warned that it “will have an immediate impact, one would have thought, on pricing”. US regulators have set levels of as much 6%.
theguardian.com
The Bank of England wants major banks to be subjected to a regulatory regime intended to prevent them hiding the risks they are taking when granting loans to households and business.
In a much-anticipated announcement, the Bank of England is requiring the biggest banks to hold 3p of capital for every £1 they lend out by imposing a 3% leverage ratio across the industry almost immediately.
The leverage ratio – a way of measuring the financial strength of banks – does not allow banks to make assessments about the risks they face, unlike the capital ratios which allow an assessment of risk to be made.
Threadneedle Street’s financial policy committee will consult next year to impose an even higher leverage ratio on the biggest banks – such as Barclays and Royal Bank of Scotland – which could push the level up to just above 4% from 2016.
On top of this there could also be another component to the leverage ratio which could push the maximum leverage ratio to 4.95% if the Bank of England thought the markets were becoming exuberant.
George Osborne, who had asked the FPC to conduct the review, said that he “fully accepts” the logic for an extra component to be added to the 3% level.
But he said more work needed to be done on understanding what the impact might be on banks and large building societies.
He said the FPC’s new consultation on imposing any extra layer to the ratio should look at “levels of lending to the real economy, the degree of competition in retail banking”, the impact on lenders with low-risk models and “the maintenance of a diverse set of business models in the banking industry”.
In a letter to the chancellor, Bank of England governor Mark Carney said: “The FPC believes that is proposals for the design and calibration of the framework will lead to prudent and efficient leverage ratio requirements for the UK financial system.”
Publishing a complex series of formulas for the banking sector, the central bank played down the impact this would have on the cost of borrowing for consumers – at least for those taking out small loan to value (LTV) mortgages; in other words, those with large deposits.
“The leverage ratio is not expected to be binding capital constraint on the majority of lenders, which might suggest that the effects, if any, on pricing in the wider market for low LTV mortgages, are likely to be quite small,” the FPC said. It did it concluded that some banks would need to be subjected to a tougher regime in some circumstances.
“The committee noted that peak losses of most UK banks during the crisis would have been absorbed by capital if a leverage requirement of 3% had been in place.
Some firms lost more, however, and for the FPC it was important – particularly for the largest firms – that they were viable after sustaining losses so that they could continue support lending to the real economy – ie having enough capital to only cover losses was not sufficient,” the FPC said.
The committee was concerned that too high a leverage ratio would have encouraged mortgage lenders to adopt riskier business models. In the US firms need up to 6% and 4% in the Netherlands.
The leverage ratio is going to become “an integral part” of stress tests and in future in will be part of the annual health check of banks. It does not allow banks to try to hold less capital by measuring the riskiness of assets.
The committee judged there was a strong financial stability case because the UK banking sector is five times the size of GDP. So it will be introduced “as soon as practicable”. “There was a strong financial stability case for introducing this framework for systematically important banks ahead of an international standard, “ the FPC said.
The independent commission on banking, chaired by Sir John Vickers, recommended in 2011 having a leverage ratio of 4%, allowing banks to borrow up to 25 times their assets, although this was not immediately adopted. The high-street banks have been taking steps to improve their leverage ratios.
Lloyds Banking Group, for example, has reached 4.7% compared with 3.8% at the end of last year while Barclays – forced to embark on a cash call last year to bolster its capital levels – has reached 3.5%. Royal Bank of Scotland’s has reached 3.9%.
Lloyds’s finance director George Culmer said on Tuesday that he expects the leverage ratio to “begin with a 4” and warned that it “will have an immediate impact, one would have thought, on pricing”. US regulators have set levels of as much 6%.
theguardian.com
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