LONDON: The Bank of England is expected to impose on UK banks a tougher leverage ratio, the broadest of capital requirements, than under proposed global rules, in a move to reassure investors that lenders can survive the next financial crisis, banking sources said.
The BoE is at the same time expected to simplify proposals on varying the new ratio, which specifies the minimum amount of core capital a bank must hold as a proportion of its total assets, regardless of how risky or safe its lending policies might be.
The BoE will publish on Friday at 1400 GMT the outcome of a public consultation by its Financial Policy Committee (FPC) on what the UK version of a globally-agreed leverage ratio should be.
The yardstick is being introduced globally under the Basel III package of banking industry reforms being made in the wake of the 2007-09 financial crisis that required many banks to be rescued by their governments.
Basel has provisionally set the ratio at 3 percent, but banking sources expect leading UK lenders will have to comply with a leverage ratio of 4 to 5 percent over time. The BoE had no comment ahead of its announcement.
At the end of June, leverage ratios at Britain's biggest banks range from 3.4 percent at Barclays and 3.7 percent at RBS, to 4.3 percent at HSBC, 4.8 percent at Standard Chartered and 3.7 percent at Nationwide Building Society. Lloyds' ratio was 4.7 percent at the end of September.
Bankers say the BoE may still stick with a basic leverage ratio of 3 percent for now and top it up with a supplementary requirement for large banks. Banks would likely be given time to reach their required levels.
Banks expect a total ratio of 4 percent or above and say that Friday's announcement lifts regulatory uncertainty. "It takes a cloud away from the stocks," a senior banker said.
Analysts said the issue is most significant for Barclays, which could have to cut lending, further shrink its investment bank or restrain dividend payouts as a result.
Barclays on Tuesday referred to a previous statement where it said it expects its leverage ratio to rise to at least 4 percent by 2016, under a plan released in May to shrink assets and restructure.
U.S. regulators have already decided to require its biggest banks to have ratios of 5 to 6 percent. Switzerland wants its top banks to have a ratio of 4 percent or more by around 2019.
Such moves in key banking centres has prompted the global Basel Committee which authored the leverage ratio rule to speed up work on finalising its ratio requirement as it faces criticism that 3 percent is too low.
PROPOSALS SIMPLIFIED
Apart from setting actual levels, bankers also expect the BoE to simplify its original proposal for varying the leverage ratios for different sized banks and for different times in the business cycle.
Under Basel the ratio is designed to be a common "simple backstop" figure to the separate, more complex system of banks calculating core capital cushions relative to the riskiness of their lending, using in-house computer models.
During the financial crisis regulators and investors lost faith in these models, suspecting they were being gamed to reduce the amount of capital needed.
A simple leverage ratio is meant to act as "insurance" against gaming, meaning a bank has to hold a minimum amount of capital regardless of what their risk-weighted valuation models say.
But the FPC proposed in July a more complex leverage ratio in the UK that can be varied over time, with tougher versions for the biggest banks.
Building societies like Nationwide have asked for leniency, arguing that a high leverage ratio would penalise them unfairly because while they have large balance sheets, they are made up of relatively low risk home loans.
"I think they have taken on board comments about undue complexity and we are expecting to see something that is quite a bit simplified," a banking source said.
"I suspect there will be fewer buffers. I think there will be a minimum buffer plus a buffer for globally systemically important banks, and we don't get the time varying buffer."
Andrew Bailey, the BoE's top banking supervisor and FPC member, has already hinted that changes may be likely. "My view is it's sensible to keep the leverage ratio as simple as you can," he told UK lawmakers last week.
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