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Deadline for bank leverage ratios remains up in the air Deadline for bank leverage ratios remains up in the air
(3 months later)
The Bank of England's financial policy committee (FPC) has got itself into a pickle on banks' leverage ratios. It has asserted their importance as a "backstop" measure of an institution's financial health, which is entirely proper since the ratio of equity to overall assets is an excellent starting point for a regulator. But the Bank has not spelled out when UK firms should meet or exceed the 3% ratio.The Bank of England's financial policy committee (FPC) has got itself into a pickle on banks' leverage ratios. It has asserted their importance as a "backstop" measure of an institution's financial health, which is entirely proper since the ratio of equity to overall assets is an excellent starting point for a regulator. But the Bank has not spelled out when UK firms should meet or exceed the 3% ratio.
The issue flared last week when the Bank's Prudential Regulation Authority (PRA) revealed that Barclays and Nationwide, alone among the big boys, are below 3%. Get the ratios up, was the message. But by when? The PRA didn't say and the FPC offered no clues today.The issue flared last week when the Bank's Prudential Regulation Authority (PRA) revealed that Barclays and Nationwide, alone among the big boys, are below 3%. Get the ratios up, was the message. But by when? The PRA didn't say and the FPC offered no clues today.
Andrew Bailey declined to talk deadlines and said instead that firms must submit "sensible, consistent and achievable" plans. Hold on, though, a sensible plan to raise capital to meet a December 2013 deadline could look very different from a plan to meet a December 2015 deadline – or, indeed, a 2018 deadline, which is the less than ambitious international target.Andrew Bailey declined to talk deadlines and said instead that firms must submit "sensible, consistent and achievable" plans. Hold on, though, a sensible plan to raise capital to meet a December 2013 deadline could look very different from a plan to meet a December 2015 deadline – or, indeed, a 2018 deadline, which is the less than ambitious international target.
Bailey further confused matters by making the throwaway remark that "it comes back to my answer about lobbying". What did he mean? Was he suggesting that Nationwide and Barclays have rushed round to Downing Street to complain about the Bank's new emphasis on leverage ratios? Well, no, when pressed, he didn't confirm that.Bailey further confused matters by making the throwaway remark that "it comes back to my answer about lobbying". What did he mean? Was he suggesting that Nationwide and Barclays have rushed round to Downing Street to complain about the Bank's new emphasis on leverage ratios? Well, no, when pressed, he didn't confirm that.
It's very odd. The common sense approach here is surely simple: set a public deadline for the leverage target to be met by all banks, but add that individual waivers will be considered when there is a pragmatic argument for doing so. Then everybody would know where they stand and any incentive to lobby would be lessened.It's very odd. The common sense approach here is surely simple: set a public deadline for the leverage target to be met by all banks, but add that individual waivers will be considered when there is a pragmatic argument for doing so. Then everybody would know where they stand and any incentive to lobby would be lessened.
On the main matter today – the order to assess the impact on borrowers of sharp rises in interest rates – the FPC is acting very sensibly given the surge in gilt yields in the past month. Some of the statistics from the financial stability report are striking.On the main matter today – the order to assess the impact on borrowers of sharp rises in interest rates – the FPC is acting very sensibly given the surge in gilt yields in the past month. Some of the statistics from the financial stability report are striking.
For example: households accounting for 20% of mortgage debt would need to take some form of action, such as cutting spending or earning more, if interest rates were to rise by two percentage points. Clearly, that event would not necessarily mean significantly higher losses for lenders, but the risks should be assessed now.For example: households accounting for 20% of mortgage debt would need to take some form of action, such as cutting spending or earning more, if interest rates were to rise by two percentage points. Clearly, that event would not necessarily mean significantly higher losses for lenders, but the risks should be assessed now.
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