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Big Banks Cut Basel Shortfall by $112 Billion at End 2012

The Bank of England will review how it can limit banks’ debt levels as Governor Mark Carney said the measure is vital for ensuring stability.

The review will take about a year and assess how the leverage ratio should be applied to banks with separate commercial and investment arms, its impact on lending and what should be the minimum “standard required to ensure the system is sufficiently resilient,” Carney said in a letter to George Osborne, the U.K. Chancellor of the Exchequer, published on the Treasury’s website today.

The Basel Committee on Banking Supervision said in March that the biggest global banks had an average leverage ratio of 3.8 percent versus a target of a 3 percent ratio for banks’ equity to debt. Barclays Plc (BARC), the U.K.’s second-largest bank by assets, announced in July that it would raise 5.8 billion pounds ($9.4 billion) in a rights offering to bolster capital, in a bid to meet requirements imposed by U.K. regulators.

“My view has been that a minimum leverage ratio is a vital component of the overall capital framework,” Carney said in the letter. “If I were to choose just one reason why Canadian banks fared as well as they did through the crisis, it would be because they were subject to a leverage standard.”

The leverage ratio is designed to be a backstop to capital requirements, helping to contain excessive debt funding.

The BOE’s review should evaluate the “impact of the introduction of the leverage ratio on the ability of the banks to support growth in lending to U.K. consumers and businesses,” Osborne said in a letter to Carney today.

Under the Basel plan, banks will have to begin disclosing how well they measure up to the leverage rule from 2015. The Basel III capital requirements are scheduled to phase in fully by 2019.

To contact the reporter on this story: Ben Moshinsky in Brussels at bmoshinsky@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net

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