Big softie

3 Dec 2013 By Dominic Elliott

The Bank of England has parked the idea of a 4 pct leverage ratio, days after retreating from tougher risk-weighted capital requirements. It’s a clear break with the Mervyn King era. But UK banks should keep building their buffers: global forces for more capital are here to stay.

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The Bank of England will not raise its leverage ratio requirements for UK banks until global regulators have agreed a common definition, according to minutes of a Financial Policy Committee meeting held in November, published on Dec. 3. UK banks currently must meet a 3 percent leverage ratio – a blunt measure of a bank’s equity to its assets.

The FPC, which is charged with maintaining financial stability in the UK, believes a common risk-based measure of capital should be used alongside a cruder leverage ratio and Basel III capital ratios based on banks’ own models. The FPC cited a PRA study of a standardised approach to credit risk that projected one-off costs of around 40 million pounds for UK banks and annual system costs thereafter of about 7 million pounds. The FPC has instructed the PRA to carry out further impact assessments on the banks.

Barclays’ shares rose 2 percent on Nov. 29 after the Prudential Regulation Authority, another arm of the Bank of England, said it would only require banks to hold 56 percent of their regulatory capital in common equity against pension and operational risks. The BoE had earlier suggested it might require banks to have all of their regulatory capital for such risks in the form of common equity.

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