LONDON: The Bank of England told British banks on Friday they will be required to hold more capital to guard against the risks of bad loans, but the new measures were less stringent than many had expected.
Shares in Barclays -- one of the banks which analysts had feared might be hit hardest by the new rules -- rose a hefty 7 percent on the news, and shares in Lloyds Banking Group also gained.
The new leverage ratio -- the minimum amount of capital banks must hold relative to their exposure to loans -- is part of global reforms introduced after the 2007-09 financial crisis to reduce the chances of banks needing public bailouts.
Britain's central bank said the ratio could rise to up to 4.95 percent from 2019, from 3 percent now.
That means banks would need to hold 1 pound of capital for every 20 pounds they lend, compared to 1 pound for every 33 pounds under current leverage rules.
"The (BoE's Financial Policy) Committee believes that its proposals for the design and calibration of the framework will lead to prudent and efficient leverage ratio requirements," Governor Mark Carney said in a letter to finance minister George Osborne. The leverage ratio requirement will be based on three things: a minimum level of 3 percent, a supplementary buffer for "systemically important" banks, and a countercyclical buffer that would be imposed when the economy is strong.
Although that could see the ratio set at 4.95 percent, it is more likely to be closer to 4 percent for most banks. Banking sources had expected the ratio to be increased to between 4 percent and 5 percent, which analysts said banks could adapt to as long as they had several years to reach it -- as they will under the proposed reforms.
"It's a little complicated but I'd expect the banks will be pleasantly surprised," said Allison Breault, a lawyer with Cleary Gottlieb Steen & Hamilton, based in Brussels.
NO DRAMATIC CHANGES
"There was an expectation the ratio would be 4 percent or more, so I don't think most banks will need to make dramatic changes as a result of these new requirements," Breault said.
The BoE's proposal is the latest in a series of steps since the financial crisis aimed at making banks protect themselves better against future risks and avoiding a repeat of the 66 billion pound ($105 billion) taxpayer bailout of Royal Bank of Scotland and Lloyds Banking Group.
Banks have argued that Britain is going too far beyond global rules, and that forcing them to hold excess capital reduces their profits, pushes up the cost of lending and could cut the amount of credit available to home-buyers and companies.
The BoE says safer banks will find it cheaper to raise funds, and that large banks that operate with dangerously low levels of capital effectively receive a public subsidy because investors think taxpayers will step in to stop them failing.
Under the BoE's rules, banks considered systemically important, so big that their failure could trigger a financial crisis -- HSBC, Barclays, RBS and Standard Chartered -- will need to hold extra capital and phase in the improvement before 2019.
The surcharge will be based on how systemically important they are ranked by the Financial Stability Board, an international body which is based in Basel, Switzerland and currently chaired by Carney. The BoE's proposals are now up for review by Britain's finance ministry, which will consult with the banks affected.
Leverage is of most concern for Barclays among the listed banks, and it could need to speed up the sale of assets, further shrink its investment bank, or constrain its dividends to meet a much higher target, analysts said.
Barclays' leverage ratio was 3.5 percent at the end of September, up from 2.1 percent at the end of 2012, which left it needing to raise 6 billion pounds ($9.6 billion) from shareholders in June 2013 when the Britain's Prudential Regulation Authority said banks must hold at least 3 percent.
Barclays said on Friday it was "very confident" it would meet the rules laid out.
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