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Tyrie sounds alarm over Bank’s capital proposals

Treasury select committee chair Andrew Tyrie has criticised proposals from the Bank of England for it to be able to set a leverage ratio for lenders, saying the plans are more complicated than expected.

In December 2012, the Parliamentary Commission on banking standards recommended the Bank’s Financial Policy Committee be given the power to limit the amount banks and building societies can lend based on the level of capital they hold in reserve.

Earlier this week, the Bank published its consultation on the power. It suggests a “time-varying ratio” that could be changed to fit the economic cycle, as well as a supplementary ratio for ring-fenced or systemically important banks and a conservation buffer.

Tyrie says: “The FPC’s consultation paper advocates a more complicated framework for the leverage ratio than many expected. These complications risk undermining the simplicity that lies at the heart of the leverage ratio. The more complex the approach, the greater the risk that the effectiveness of the leverage ratio is undermined.”

The leverage ratio would operate in conjunction with capital requirements, which the FPC already has the power to set.

During a TSC hearing with members of the FPC yesterday, external member Donald Kohn said he would be concerned if the FPC wanted to increase capital requirements and was unable to adapt the leverage ratio. He said it could encourage risk shifting in the banking system. 

He said: “You could induce complex behaviour you want to avoid.” 

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