London (BBN)-British banks may have to hold more funds to guard against the risk of a future economic downturn.
The Bank of England wants to reduce the chances of banks needing taxpayer bailouts, reports BBC.
The Bank said that the level of reserves compared to loans could rise from 3 percent to 4.95 percent from 2019.
That means banks would need to hold £1 of capital for every £20 they lend, compared with £1 for every £33 today.
Mark Carney, the governor of the Bank of England, told the chancellor: “The committee believes that its proposals for the design and calibration of the framework will lead to prudent and efficient leverage ratio requirements.”
George Osborne must approve the proposals, and said in response that there would need to be further consultation with lenders on the impact of a higher leverage ratio. The ratio is the minimum amount of capital that banks must hold relative to their exposure to loans that could fall in value.
The bank has devised a complex calculation for the leverage ratio, whereby the minimum level will be based on several factors, including the size of the bank, where Britain is in the credit cycle, and other issues yet to be finalised.
As a result, the minimum leverage ratio for most banks is likely to be far lower than 4.95%. If the economy is regarded as weak and lending prudent, the leverage ratio would only go as high as 4.05%.
Analysts had expected the ratio to be increased to between 4% and 5%, which they said banks could adapt to as long as they had several years to reach it.
BANK SHARES RISE
Investors welcomed the better than expected news, sending shares in Barclays up 8.2% by the London close to 241p, while Royal Bank of Scotland jumped 6.2% to 388p.
A spokesman for Barclays said the bank had a leverage ratio of 3.5% and was on track to exceed 4% in 2016: “Therefore we are very confident that we will exceed the requirements set out today with our existing plans.”
Lloyds gained 2.6% and HSBC added 1.65%.
Andrew Tyrie, chairman of the Treasury select committee, said it was vital that the Bank of England’s Financial Policy Committee (FPC) set the leverage ratios at an appropriate level.
“The FPC may have found an ingenious, albeit somewhat complex means of calibrating the leverage ratio to the risk-weighted capital framework. The Treasury committee will be taking evidence on the extent to which they have succeeded, on the level itself, and on other aspects of these important proposals,” he said.
The Bank of England’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 £66bn taxpayer bailout of RBS and Lloyds Banking Group.
Banks have argued that Britain is going too far beyond global rules. They claim that forcing them to hold excess capital reduces their profits, increases the cost of lending and could cut the amount of credit available to home-buyers and companies.
The Bank of England said that safer banks would find it cheaper to raise funds, and that large banks that operated with dangerously low levels of capital effectively received a public subsidy because investors think taxpayers will step in to stop them failing.
BBN/JF-01Nov14-1:20pm (BST)