UK financial policy committee backs case for bank leverage ratios

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The City watchdog warned on Friday that banks and building societies could mislead regulators about the risks they pose to the financial system without tougher rules forcing them to keep more reserves.

The financial policy committee, an arm of the Bank of England, said a leverage ratio could be needed in addition to a risk weighted ratio to make sure banks keep enough capital aside during boom years in case of a financial credit crunch.

In a consultation document, the FPC said building societies, which have stayed outside the casino-style international markets, would be caught by the new rules and may be forced to either diversify or charge their customers higher mortgage rates to raise the necessary capital.

Most major countries with large financial centres are redesigning their regulation of banks to make them more secure. The FPC wants to include a leverage ratio to force banks that underestimate the risks they take to also hold capital based on the size of their loan book.

Many building societies already have higher capital ratios than the major banks, but some could be caught by the new rules depending on the level eventually set by the regulator.

It is expected that whatever rules and leverage ratios are agreed will take effect in 2019.

The chancellor asked the FPC last year to examine all the ways financial institutions could be made to protect against a sudden financial collapse.

The Basel committee, which oversees international banking regulation, has established a basic framework for capital ratios.

The UK imposed a temporary leverage ratio on the largest systemically risky banks following the financial crisis. But Basel is not expected to begin discussion of leverage ratios until 2017.

Powered by article was written by Phillip Inman, economics correspondent, for on Friday 11th July 2014 10.22 Europe/London © Guardian News and Media Limited 2010


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