BoE to review power over banks' balance sheets

The Governor of the Bank of England (BoE), Mark Carney, has agreed to review whether the bank should have more power over leverage ratios at U.K. banks, building societies and law firms.

Setting a leverage ratio - the ratio of equity to debt - at financial institutions is seen as a key way of limiting the size of balance sheets. Speaking in front of the Treasury Select Committee of British lawmakers on Tuesday, Carney said the ratios were "integral to the capital framework of banks."

(Read more: BoE upgrades growth forecasts as recovery takes hold )

It came after an exchange of letters between Carney and British Chancellor George Osborne, who requested the review. Osborne said that "much greater certainty on the medium term capital framework for U.K. banks" was needed.

The BoE's Financial Policy Committee (FPC) will look into whether it needs any additional powers over the leverage ratio and how it should use these powers. Currently, it is not able to change the leverage ratio.

The FPC, which oversees the regulation of the U.K. financial system, will provide a report into the issue within 12 months, Carney said.

(Read more: Bank of England sees 'uncertainties' in recovery )

Details of the leverage ratio are due to be agreed internationally by the Basel Committee on Banking Supervision early in the New Year, and will become mandatory on January 1, 2018.

But there is currently much uncertainty at British banks about what capital ratios will be required. A source at one bank, who did not want to be named, said their bank had prepared for five different scenarios to be announced.

Mike Trippitt, banks analyst at Numis Securities, told CNBC: "There are some scenarios where it could be as high as 13 percent, but I think that's far-fetched."

"It feels like the Royal Bank of Scotland gave us the answer when it announced the bad bank, with a 12 percent ratio," he added.

(Read more: Bank of England: 2014 rate rise very unlikely )

Leverage ratios are part of a wider set of banking reform measures - known as Basel III - which is due to come into effect at the start of January 2019.

It aims to strengthen the banking industry following the financial crisis of 2008 which saw a number of big banks - such as Lehman Brothers - collapse. Many others received state aid after being deemed "too big to fail" - meaning that if they went under they would significantly damage the wider banking industry and economy.

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image: © Ofer Deshe

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