PRA to tighten reins on British banks

BRITAIN’S banks could have to use a stricter method than global peers for calculating a key measure of capital from next year to make gaming the rules harder, the Bank of England has revealed.

The BoE’s Prudential Regulation Authority (PRA) published a consultation paper setting out how lenders should compile and publish leverage ratios, a measure of capital to balance sheets on a non-risk-weighted basis. The benchmark is separate from a bank’s core ratio, which measures capital to riskweighted assets.

Under EU rules brought in after the financial crisis showed inadequate capital at banks, lenders must publish their leverage ratio at the end of each quarter.

The PRA’s proposed method seeks to supplement this with a more stringent approach based on daily averages throughout the quarter, moving in line with the US.

“The PRA is of the view that reporting and disclosing a point-in-time leverage ratio alone could create incentives for firms to manage down temporarily around the reporting date their exposure measure so as to flatter their leverage ratio, a practice commonly referred to as ‘window dressing’,” the regulator said.

“Requiring an averaged figure for a firm’s leverage ratio across the reporting period should largely eliminate incentives to adjust this ratio on any specific date, as any increase achieved is likely to have little impact on the averaged figure.”

It is the latest sign of how more hawkish regulators such as the PRA are making it harder for banks to skirt rules. Policy-makers have said that lower book values of banks in Europe compared with their US rivals are part-

‘This could create incentives for firms ... to flatter their leverage ratio, referred to as window dressing’

ly due to investors not fully believing the capital ratios they report.

The BoE has considered requiring larger banks to calculate core capital ratios using a “standard” formula used by smaller banks as well as using inhouse models the consistency of which has been questioned.

Britain, Switzerland and the US have put more emphasis on a bank’s leverage ratio, which was originally meant to be a simple “backstop” to core buffers.