UK banks given capital rules deadline

UK banks given capital rules deadline

Banking shares rose today after Britain’s biggest lenders were given until 2019 to meet new standards on financial health set by the Bank of England.

A minimum leverage ratio, no higher than 4.05%, will be above the proposed international standard of 3% but at the lower end of City expectations.

The measure is defined by how much capital banks hold as a proportion of their loans and having a minimum level is seen as an important back stop for financial stability.

This could be raised as high as 4.95% should the Bank wish to guard against instability, under the new measures.

But there had been fears that if the ratio had been set too high – or if lenders had not been given enough time to meet them – they would have been hampered by having to hoard cash to build up those capital reserves.

Instead, they were told they will have until 2019 to meet the new standards.

Barclays shares rose 8% as it welcomed the result of the review by the Bank of England’s Financial Policy Committee (FPC).

The lender’s current leverage ratio of 3.5% is lower than rivals so it looked likely to be more affected if the rules had been tighter.

A spokesman said: “The leverage requirement recommendations set out by the FPC will help to ensure the financial stability of UK based banks and we welcome the certainty they provide to the industry.”

Barclays said it was “well on track” to reach its target of a ratio of more than 4% in 2016, adding: “Therefore we are very confident that we will exceed the requirements set out today with our existing plans.”

State-backed Royal Bank of Scotland – also buoyed by its announcement of third-quarter profits of £1.27 billion – climbed 6%.

The new leverage ratio requirements will add “buffers” over and above the level of the international standard known as Basel III.

But, in a letter to Bank of England governor Mark Carney published alongside the review, Chancellor George Osborne backed the need for more consultation over the measures saying more work needed to be done on the impact of the new standards.

Mr Osborne said consideration needed to be given to the impact on lending to the real economy and competition in high street banking, as well as those banks with “low average risk weights”.

This is because the leverage ratio, unlike others, treats all categories of loans on their books as the same. Other measures have been risk-weighted – based on the idea that certain types of bank assets such as mortgages are less risky.

But following the financial crisis the idea of a simpler backstop measure without the complex risk-weighted element gained currency.

However there are concerns the changes could adversely affect lenders such as building societies with higher concentrations of lower risk assets such as mortgages.

In his letter to Mr Osborne, Mr Carney said the scale of the UK financial sector and its largest banks reinforced the need for a leverage requirement saying it addressed dangers “not adequately dealt with by the risk-weighted capital framework”.

“The committee believes that its proposals for the design and calibration of the framework will lead to prudent and efficient leverage ratio requirements for the UK financial system,” he said.

Simon Hills, executive director of the British Bankers’ Association, said: “The Bank’s proposals will provide the UK banking industry with a framework which balances safety with the need to keep lending affordable for businesses and individuals.

“The proposals are clear, simple and further enhance the safety of the UK banking industry. They will help to ensure that the UK has one of, if not, the safest and most competitive banking markets in the world.”

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