LONDON (Reuters) – Britain’s finance minister George Osborne has asked the Bank of England to consider whether it needs extra powers to restrain banks’ risk-taking and accelerate a timeframe for new rules agreed by international financial regulators.
The BoE’s Financial Policy Committee can already shape the regulation of Britain’s financial system. It has powers to force banks to hold more capital but has no direct say over a separate tool for reining in big banks’ risk-taking, a so-called leverage ratio.
Global regulators, keen to make banks safer after the financial crisis, are focusing on the leverage ratio as a way to prevent banks from taking on too much risk and mitigate any attempts to circumvent the other capital rules.
They are finalizing details of the ratio, which is due to come in from the start of 2018, but lawmakers, including Andrew Tyrie, chairman of the influential Treasury Select Committee, want the FPC to have the power to set bank leverage ratios immediately.
“Therefore now is an appropriate time for the FPC to consider whether and when it needs any additional powers of direction over the leverage ratio,” Osborne said in a letter to BoE Governor Mark Carney.
The ratio measures the amount of capital a bank holds as a percentage of its assets (loans), without adjustments for risk. A leverage ratio of 3 percent, for example, means a bank can lend up to 33 pounds for each pound of capital it holds in reserve.
The ratio is part of global rules, known as Basel III, being phased in to force banks to hold more capital after many, including Royal Bank of Scotland (RBS.L ), had to be rescued by taxpayers in the 2007-09 financial crisis.
Osborne was “open” to the Bank’s review recommending implementation of the leverage ratio ahead of a globally agreed timetable, the letter said.
Osborne also said Britain might need to set a baseline leverage ratio higher than a globally-agreed 3 percent level. But the review would also have to show that implementing the leverage ratio faster or higher than the Basel accord would help UK financial stability, he said.
In his reply, Carney agreed that the time was right for such a review and he expected the FPC would be able to complete it within 12 months.
Speaking to lawmakers in parliament later on Tuesday, Carney underscored the importance of leverage tools for policymakers.
“If I could pick one element that was essential to the performance of the Canadian banking system during the crisis it was the presence of a leverage ratio,” he said.
BANK FAILURE PREVENTION
The FPC will publish some “high-level considerations” on the role of the leverage ratio within the overall capital framework of UK banks in its bi-annual Financial Stability Report on Thursday, Carney said.
The FPC will need to assess how the leverage ratio would affect the ability of banks to keep lending, Carney said.
The leverage ratio calculation treats all assets on a non- risk-weighted basis, meaning that a big home loans lender, could be penalized more than an investment bank that takes more risk.
Osborne’s intervention on Tuesday accelerates a review of possible FPC leverage ratio powers that had been anticipated at a later date.
Several members of Britain’s upper house of parliament are expected to argue later on Tuesday that a higher leverage ratio is needed to prevent future bank failures.
The Banking Reform Bill, which the coalition government sought to enact in the wake of the financial crisis, will be debated in Britain’s upper house of parliament on Tuesday and Wednesday.
Members of the Parliamentary Commission on Banking Standards, including Archbishop of Canterbury Justin Welby and Nigel Lawson, a former Conservative finance minister, are advocating a number of amendments to the bill including a more robust system for vetting senior bankers.
Britain’s opposition Labour party wants the financial regulator to have a backstop power to break up all banks if rules requiring lenders to ring-fence their retail operations from riskier investment activities are ineffective.
(Reporting by David Milliken, Christina Fincher, Huw Jones and Silvia Antonioli and Matt Scuffham. Editing by Chris Vellacott and Jane Merriman)
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