EUROPE’S banks could soon face the same tough conditions as their British peers as the continent’s regulators yesterday said they would look at imposing a leverage ratio cap similar to that taking hold in the UK.
British lenders such as Barclays and Nationwide have been caught by the three per cent cap, with both forced to raise capital or cut lending to meet the new target.
The Bank of England insists the measure is vital to keep banks stable and to allow them to borrow and lend more cheaply in future.
And yesterday the European Banking Authority (EBA) indicated it may take similar steps.
The agency is worried national authorities and individual banks are measuring risks in such a wide range of ways that the stability of the sector may be undermined, in part because regulators and investors will not be able to compare capital levels easily between banks.
Even when removing variation in banks’ assets, the report found “the existence of variation in expected losses and risk weighted assets by exposure across banks even when the analysis is conducted on hypothetical identical exposures to the same counterparties.”
It wants to reduce big banks’ freedom to calculate their own risk weights and create a level playing field in the rules across Europe.
In particular it is worried about low default portfolios – loans which banks deem to be the least risky – as it is afraid some banks may be under-reporting potential losses and so the capital requirements for these apparently safe loans.
The EBA also noted that in future it will consider making banks publish more information on the way they compile their capital ratio figures to give regulators and investors a better view of the risks being taken.