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Treasury caves into pressure over Bank leverage ratio review

The Government has caved into pressure and launched a review over whether the Bank of England should have the power to increase banks’ leverage ratios.

In an exchange of letters with Bank governor Mark Carney today, Chancellor George Osborne called on the Bank to make an evidence-based case for new powers as part of a 12-month review.

The shift comes ahead of the Banking Reform Bill report stage debate in the House of Lords today, the final chance for major legislative change on financial services after five years of reform.

It is the second U-turn in two days on banking reform after Osborne agreed to impose a cap on the overall cost of credit from payday lenders yesterday.

In line with European rules, UK banks need a leverage ratio of 3 per cent, the minimum level of capital, but Sir John Vickers’ Independent Commission on Banking recommended a higher level of 4.06 per cent.

Building societies, notably Nationwide, have lobbied hard against an increase claiming it would cripple their mortgage lending.

The compromise is very similar to recommendations from the Parliamentary Commission on Banking Standards, which branded the current levels “extremely weak”.

It says the Bank’s financial policy committee should have the power to increase or lower the level to manage stability. In February 2012, the FPC requested the power to direct leverage rules.

The move comes after Banking Reform Bill amendments backed by cross-party heavyweights including former chancellor Lord Nigel Lawson, former Treasury select committee Lord John McFall, former Cabinet secretary Lord Andrew Turnbull and Archbishop of Canterbury Justin Welby.

The Treasury says international changes make now an appropriate time to change and it was already planning a review for 2017.

In his letter, Osborne said he is “open” to making a recommendation for a higher level but says he needs to see “clear evidence”.

He said: “Now is an appropriate time for the FPC to consider whether and when it needs any additional powers and how any new powers would fit in with the rest of its macro-prudential ‘tool-kit’.”

Carney agreed the time is right for a review and minimum capital rules were vital for financial stability, signalling his support for higher levels.

He said: “My view has been a minimum leverage ratio is a vital component of the overall capital framework. As I said to the Treasury committee in February, if I was to choose just one reason why Canadian banks fared as as they did through the crisis, it would be because they were subject to a leverage standard.

“It is therefore crucial we have an appropriately calibrated minimum leverage ratio for UK banks. There is also a compelling logic to move that minimum in the light of any variations in the corresponding risk-weighted standards.”

Labour has consistently backed the higher leverage level and payday lender cap. It has tabled a series of other amendments imposing higher professional standards in banking and a fiduciary duty on financial services staff.


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