BoE sets out new capital rules for banks

BRITISH banks may have to hold bigger capital cushions to guard against their loans turning sour following new moves yesterday by the Bank of England.

The central bank said that lenders may see their so-called “leverage ratios” – the minimum amount of capital they must hold as a percentage of their loanbook – rise from 3 per cent now to 4.95 per cent by 2019.

Analysts said that, in effect, this meant Britain’s biggest eight banks and building societies would need to hold £1 of capital for every £20 they lend. That compares with £1 for every £33 under current leverage rules.

Mark Carney, governor of the Bank, said in a published letter to Chancellor George Osborne that its financial policy committee, which monitors systemic risk in the economy, believed its proposals for the design and mechanism surrounding the new framework would “lead to prudent and efficient leverage ratio requirements”. Osborne needs to approve the proposals.

Analysts said the minimum level will be based on several “moving parts”, including the size of the bank and where Britain is in the credit cycle.

They said as a result the minimum leverage ratio would be likely to be far below the 4.95 per cent ceiling. If the economy is regarded as weak, but lending is deemed to be prudent, the leverage ratio would only go as high as 4.05 per cent.

This is near the bottom of the 4 to 5 per cent range the industry had anticipated. MARTIN FLANAGAN