BOE Eases U.K. Bank Leverage Rule to Aid Economy Post-Brexit

  • Central bank underlines that easier leverage is temporary
  • BOE says change affects central bank claims, risk unaffected

The Bank of England eased restrictions on bank leverage as it seeks to help the economy weather the impact of Britain’s vote to leave the European Union.

In a letter published Thursday, the central bank’s Prudential Regulation Authority encouraged U.K. banks to apply for a temporary modification allowing them to exclude central bank reserves when calculating their total exposure to risk. Based on current levels of reserves, the BOE’s Financial Policy Committee estimated the change would result in banks needing 11 billion pounds ($14.5 billion) less capital to comply with the leverage constraint.

The policy committee is aiming “to ensure that the leverage ratio does not act as a barrier to the effective implementation of policy measures that might lead to an increase in central bank reserves,” according to a statement on its website. “These measures include actions taken to maintain monetary and financial stability since the referendum on the United Kingdom’s membership of the European Union.”

The FPC said banks’ reserves at the central bank could increase because of monetary policy measures, such as repurchase agreements with the BOE. The move coincides with the BOE’s decision to cut its key interest rate and lend more money to banks to boost the economy.

“The FPC judges that this change to the exposure measure is appropriate because an increase in central bank claims does not typically expose a firm to additional risks, if matched by deposits in the same currency,” the PRA said in the statement on its website. Removing reserves from the calculation “mechanically reduces the nominal amount of capital required to meet the leverage ratio standard, other things equal. This is not the FPC’s intention,” it said.

The FPC intends to recalibrate the U.K. leverage ratio framework to offset the impact of the changes as part of a review of the regulation in 2017. The committee said it wants the change affecting central bank reserves to be put in place permanently and will consult on how to adjust for the impact. The FPC said it wanted the Basel Committee on Banking Supervision, which includes the U.S. Federal Reserve and European Central Bank, to review the effects of changes to the leverage ratio.

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