Chancellor George Osborne wants lenders to leverage up a maximum of 33-times their total capital. But MPs and peers have backed Sir John Vickers who wants a cap at 25-times their capital base, arguing this reduces risk.
However some building societies are well in excess of this 25-times cap, despite being regarded as less risky than the big banks.
“In the banking world the leverage ratio is intended to be a back stop measure of capital adequacy which takes no account of risk weighted assets. Crucially the building society model has lower risk assets, a stable retail funding base, but restricted access to capital,” said chairman David Webster at the BSA’s annual conference. “A high leverage ratio is a blunt instrument which could very substantially affect the structure and nature of our business. It could for example make prime residential lending far more capital intensive and perversely encourage societies to move further up the risk curve to make a profit.”
Webster also attacked the Bank of England’s demands for lenders to simultaneously raise capital levels and lend more, arguing the contradictory instructions simply raise uncertainty in the sector.