Lloyds CEO Says Leverage Rules Will Boost Mortgage Costs

Lloyds Banking Group Plc, Britain’s biggest mortgage lender, sees the cost of U.K. home loans rising as regulators prepare to increase the capital the country’s banks must hold, making lending more expensive.

Chief Executive Officer Antonio Horta-Osorio, 50, said today the higher the Bank of England sets the leverage-ratio requirement on Oct. 31, the greater the corresponding increase in mortgage pricing. The regulation dictates how much equity capital banks must hold against their assets and measures a bank’s total lending, without weighting categories of loans by their riskiness.

“Banks will have to include the new cost of capital on their pricing,” Horta-Osorio said on a conference call with investors today to discuss the bank’s third-quarter results. Depending on what leverage level the BOE sets this week, “it will have less or bigger impact on mortgage pricing because it’ll become a restriction.”

U.K. regulators are demanding larger capital buffers to make bank failures less catastrophic after taxpayers had to bail out the financial system six years ago. The BOE said in July large, important banks must boost their leverage ratios above the minimum 3 percent level required by the Basel Committee on Banking Supervision. As the leverage measure isn’t risk-weighted, it is harder for banks to game than other capital gauges that allow banks to take asset quality into account.

“What is being said on Friday I’m pretty sure will bite” our competitors, Chief Financial Officer George Culmer said. “When you look at where some of our peers currently are, that will have an immediate impact, one would have thought, on pricing” of banking products such as mortgages.

Barclays Plc is expected to have the largest capital shortfall among the U.K.’s major lenders, followed by Royal Bank of Scotland Group Plc and HSBC Holdings Plc, analysts at Morgan Stanley estimated. Lloyds will have the smallest hole to plug.

This week’s European stress tests revealed a lower capital level at Lloyds than some analysts expected, raising concerns the bank may have to delay a return to dividend payments. Today, the bank reported third-quarter pretax profit rose 41 percent to 2.16 billion pounds ($3.49 billion), beating estimates.

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