Bank of England deputy governors Paul Tucker and Andrew Bailey said it’s right for U.K. regulators to impose a 3 percent leverage ratio immediately on banks, five years earlier than plans agreed to by global regulators.
“There is very clear view from our side that a 3 percent leverage ratio is a sensible minimum point to have institutions at, and those who are not at to have plans to get to,” Bailey told lawmakers in Parliament in London today. “We are trying to establish what I would call a minimum baseline.”
Barclays Plc Chief Executive Officer Antony Jenkins said last month the bank may cut lending if the BOE’s Prudential Regulation Authority forces the lender to speed up plans to increase its leverage to 3 percent by 2015. The PRA ordered Barclays to increase the ratio, a measure of its proportion of debt to equity funding, to at least 3 percent from about 2.5 percent. The lender has to agree its plan with the regulator by the end of July.
Banks presented plans to the PRA before the end of June and Bailey said regulators are now examining the proposals. Tucker agreed that imposing the 3 percent ratio now was the correct measure.
Global regulators included a provisional version of the leverage limit in an overhaul of banking rules in the wake of the 2008 financial crisis. The rule differs from other capital requirements set by the Basel committee because it gives banks no scope to take into account the riskiness of their investments when working out the reserves they need.
While the leverage ratio won’t be binding until 2018, lenders will be obliged to start publishing how well they are measuring up to it by the start of 2015, the Basel group said last month.
“I’m very much a believer that we should use both the risk-based and leverage approaches to assess institutions and you would be tying one hand behind our backs” if the BOE’s Financial Policy Committee didn’t have authority over the latter, Bailey said.
Tucker and Bailey, members of the FPC, were speaking at a hearing of lawmakers into the Financial Stability Report, published last week. Bailey said he told Co-Operative Bank Plc, the U.K. lender that abandoned a bid to buy branches from Lloyds Banking Group Plc, to raise capital in 2011. The lender had its credit rating cut four levels last month by Moody’s Investors Service, saying a “further burden sharing may be required at some point.”
Parliament’s Treasury Committee “will want to look at whether the regulator’s message got through, how it was conveyed and what, if any, action was taken as a result,” Chairman Andrew Tyrie, a Conservative lawmaker, said in an e-mailed statement, after noting that Lloyds was only made aware of the Co-Op’s capital shortfall in December 2012.
Tucker also expressed concern about the government’s Help to Buy Scheme, aimed at supporting homeowners with interest-free loans and mortgage guarantees.
“The government has been prudent in saying three years in we will ask the FPC to have look at this,” Tucker said. “We will address the financial-stability question, not the other pros and cons. This is a government scheme. It carries some risks over the medium term, we’ve been given a lever over that.”
He added he expects the FPC would act if there were any signs of a bubble that could jeopardize financial stability.
On the economy, Tucker said the economy is showing signs of strengthening,
“We’re now in a period where there appears to be, thank goodness, something of an economic recovery that appears to be sustained,” he said. “But the road is going to be very bumpy.”
Asked about the lobbying of politicians by banks on regulation, Tucker said it’s “unacceptable” and “pointless,” adding that it may be a “difficult” habit for lenders to end.
On recent concerns about the Federal Reserve withdrawing stimulus, Tucker said the market reaction was a sign that regulators need to ensure the resilience of the financial system. Still, it was an “alert with a small a” and doesn’t signal the “edge of a cliff,” he said.