The Bank of England (BoE) has revealed proposals to increase the leverage ratio of UK banks to ensure they have a larger safety net to fall back on in the event of another financial crisis.
The tough new measures will force banks to keep capital of up to 4.95p for every £1 they lend by 2019- an increase on the three per cent already required from the UK's biggest banks.
It includes supplementary buffer of up to 1.05 per cent, taking it up to 4.05 per cent, as well a countercycle buffer of between 0 and 0.9 per cent, taking it up to the maximum potential ratio of 4.95 per cent.
The exact ratio will be based on a number of factors such as the size of the bank and others yet to be decided by the BoE's Financial Policy Committee (FPC).
Markets responded positively to the development as analysts expected the BoE to require a higher ratio of more than five per cent. Barclays shares leapt nearly ten per cent in afternoon trading while shares in RBS, HSBC and Lloyds also went up.
Barclays, HSBC and other big global banks will be subject to an earlier requirement of introducing a buffer of up to 0.875 in addition to the current three per cent from 2016. Smaller banks could also be subject to the current minimum three per cent requirement imposed on big banks, from 2018, pending a review in 2017.
The FPC made the recommendations to Chancellor George Osborne this afternoon after he asked the FPC to begin a review of banking leverage ratio in November last year.
Writing to the Treasury, BoE governor Mark Carney said:
Following the review, the committee has concluded that there is a strong case for introducing a leverage ratio in the UK ahead of an internationally agreed standard and that it should apply to global systematically important banks and other major domestic UK banks and building societies.
The number of systematically important institutions present in the UK and the size of the UK banking system relative to the domestic economy reinforce the importance of building a complementary and robust supplementary leverage requirement to address risks that are not adequately dealt with by the risk -weighted capital framework and to respond to risks to financial stability that might emerge before any international standard on leverage is agreed and implemented.
The committee believes that its proposals for the design and calibration of the framework will lead to prudent and efficient leverage ratio requirements for the UK financial system.
Osborne said the Treasury backed the BoE proposals and would seek to get legislation through parliament which would grant the FPC powers to implement them.
However, the chancellor warned that the FPC should consider the effect of different ratios on lending levels, competition in retail banking, the impact on lenders with low average risk weights and the maintenance of a diverse set of business models in the banking industry.
Investec analyst Ian Gordon warned of the effect on lending, but called the proposals "eminently manageable".
A leverage ratio, by its very nature, makes low risk lending less attractive. As such, today’s announcement of new leverage requirements was always an exercise in damage limitation. In our view, one should not underestimate the scale of (permanent) costs imposed on the British public in terms of higher mortgage costs than would otherwise have been the case. Be that as it may, we think today’s proposals are eminently manageable – a clear relief for Barclays and positive for mortgage banks more generally.