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Markets relieved by ‘less draconian’ FPC leverage ratio proposals

Banks and building societies could be forced to hold capital worth up to 4.95 per cent of assets by 2019 following new proposals outlined today by the Bank of England.

Recommendations by the Bank’s Financial Policy Committee call for a leverage ratio of 4.95 per cent, up from the current 3 per cent ratio, which includes a supplementary buffer of up to 0.9 per cent. 

Without the buffer, the new capital requirement would be up to 4.05 per cent.

Larger banks, termed as systemically important to the global economy, would under the new regime be forced to hold a buffer of up to 0.875 per cent above the current 3 per cent leverage ratio from 2016. The size of the buffer would be dependent on the size of the bank in question.

The leverage ratio proposed today is “less draconian” than previously expected, says the Building Societies Association, and markets have reacted favourably to the announcement, with several banks’ shares rising following the publication.

A BSA spokeswoman says: “The FPC announcement today demonstrates that they have heard and responded to some of the multiple concerns that have been expressed about the impact of a high leverage ratio introduced early, particularly on areas such as mortgage availability and price. 

“The framework that the FPC is recommending to HM Treasury is less draconian than we had feared, although certain elements such as the change from total tier 1 capital to CET1 plus a small proportion of AT1 remain unwelcome.

“It is not new news that the systemic firms are expected to meet a 3 per cent ratio. In our submission we called for any leverage ratio for the remainder of the banking sector to be introduced in line with the Basel 3 timetable and this is what has been announced.” 

Treasury select committee chairman Andrew Tyrie says: “The Parliamentary Commission on Banking Standards concluded that the FPC —not politicians—should set the leverage ratio. Now they have made a start.

“It is crucial they do a good job – too high a ratio and borrowing and economic growth are unnecessarily constrained; too low, and the taxpayer is at risk from financial instability.

“The FPC may have found an ingenious, albeit somewhat complex means of calibrating the leverage ratio to the risk-weighted capital framework. The Treasury committee will be taking evidence on the extent to which they have succeeded, on the level itself, and on other aspects of these important proposals.”

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