Bank of England set to push banks to increase buffers again despite fears it will hit lending

 
Tim Wallace
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BANKS are braced for another hike in capital requirements – or another squeeze on lending – as the Bank of Eng­land prepares to hike the leverage ratio, under proposals expected to be unveiled this month.

The key ratio limits the amount of loans banks can offer, relative to the bank’s capital buffer.

Under global Basel III rules, there is a three per cent ratio, meaning banks can make loans totalling 33-times their capital base.

But the Bank of England is expected to choose a tougher level, and has in the past hinted at a four per cent ratio – limiting banks’ assets to 25-times their capital.

Andy Haldane, now the Bank’s chief economist and a member of the monetary policy committee, last year warned that “a 33-times leveraged banking system sends shivers down my spine”, in an interview with the Treasury Select Committee of MPs.

The leverage ratio differs from banks’ capital ratios, as it is not based on the relative risks of each loan.

As a result banks with large high-quality mortgage books like Lloyds and building societies like the Nationwide will be hardest hit.

When the assets are risk-weighted they perform well, but the backstop of an tougher, unweighted leverage ratio may hurt their potential for increasing lending in future.

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