Bank stability chief calls for bank leverage limits
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Bank of England Financial Stability executive director Andrew Haldane has called for the introduction of leverage limits on banks in an attempt to curb future state reliance.
In a joint presentation with BoE economist Piergiorgio Alessandri, Haldane says that an introduction of a leverage limit would make banks less reliant on the Government and the central bank.
He said: “One simple means of altering the rules of the asymmetric game between banks and the state is to place heavier restrictions on leverage. European banks were not subject to a regulatory leverage ratio in the run-up to crisis. They exploited that loophole.
“Closing it would bring about a clockwise rotation in banks’ payoff schedule, lowering the beta of banks’ equity returns and reducing risk-taking incentives.”
Haldane says any rules must be regulatory law rather than down to the discretion of the individual banks.
He said: “The ratios need to be robust to the seductive, but ultimately siren voices claiming this time is different.”
“In 1360, a Barcelona banker was executed in front of his failed bank, presumably as a way of discouraging generations of future bankers from excessive risk-taking.”
The stability chief also called for a recalibration of risk, arguing that the old capital requirements have been proved to be severely lacking.
He said: “The Basel Committee has already set about trying to correct some of the more obvious of defects. The reforms will close a regulatory loophole and thereby lower systematic risk in the banking system.”
He said there will be higher weights attached to assets such as securitised and re-securitised products. “New risk weights should better reflect the tail risk these products embody,” said Haldane.
Haldane argues that such a process will help the debates surrounding the possible split between banking and trading books, and the arguments for and against the re-securitisation of assets.
In his speech, Haldane detailed the history of central banks’ and their relationship with the state.
He said: “In the early days of banking, liability was not just unlimited; it was often as much personal as financial. In 1360, a Barcelona banker was executed in front of his failed bank, presumably as a way of discouraging generations of future bankers from excessive risk-taking.
“In the past, the biggest risk to the banks was from the sovereign. Today, perhaps the biggest risk to the sovereign comes from the banks. Causality has reversed.”
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