A group of MPs and peers has been pushing for a four per cent leverage cap, a tighter limit than the three per cent currently in place.
Lenders like Nationwide, which specialises in mortgages, fear it would unfairly penalise their low-risk model, hitting lending.
And Santander’s Steve Pateman said it could perversely drive up risks at banks as it does not account for the varying risks of different loans.
“You have to be able to differentiate between the relative risk of assets. Without that, everyone will play at the highest risk – it is the only way to get a higher return,” he told the Economist European Retail Banking Summit.
“You will have banks taking more risk and withdrawing from lower risk lending categories.”
He added that banks will also be less diversified, increasing risk in the system.
He was hitting back after influential peer Lord McFall told the same conference that banks are too highly leveraged.
Pateman’s view is widely held in the industry, though few openly express it for fear of angering public opinion and policymakers.