LONDON (Alliance News) - The UK's major banks and building societies could be required to have a leverage ratio of up to 4.95% by the end of the decade in certain circumstances, well above the current minimum of 3.0%, under proposals made by the UK Financial Policy Committee on Friday.
In a review of the leverage ratio the FPC recommended a minimum requirement of 3.0%. However, it also recommended a supplementary leverage ratio buffer of 35% of the corresponding risk-weighted systemic buffer rates, which would give rise to a leverage ratio of 4.05%. Also included was the proposal to give the FPC the power to use a countercyclical leverage ratio buffer, which if used by the FPC, could result in the total leverage ratio requirement rising to up to 4.95% for certain firms.
Earlier Friday, Royal Bank of Scotland Group PLC said that its leverage ratio had increased to 3.9% from 3.7% during the third quarter ended Sept 30. The bank said it has a medium term target of attaining a leverage ratio of between 3.5% and 4.0%, while wanting to maintain a ratio of at least 4.0% in the long-term.
On Thursday, Barclays PLC said its own leverage ratio had increased to 3.5% from 3.4% over the same period. On Tuesday, Lloyds Banking Group PLC said its leverage ratio rose 0.2 percentage point to 4.7% over the course of the third quarter. HSBC Holdings PLC provides its interim management statement for the third quarter on Monday.
The FPC defines the leverage ratio as the ratio of a firm's capital level to a gross measure of its exposures or assets. Because assets must be funded either by capital or debt, the lower a bank's leverage ratio, the more it relies on debt rather than capital to fund its assets. In weighing all assets equally, the leverage ratio differs from risk-weighted capital ratios, which differentiate capital requirements according to estimates of the relative riskiness of different types of assets.
The leverage ratio is meant to work together with risk-weighted capital ratios in order to ensure firms are able to cope with periods of stress.
Since the financial crisis, which called into question the reliability of firms' risk models, regulators have increased their emphasis on the leverage ratio in order to guard against the possibility of firms getting their risk modelling wrong.
The Bank of England's FPC is responsible for identifying, assessing, monitoring and taking action to ensure financial stability.
It launched a consultation of the leverage ratio in July upon the request of Chancellor of the Exchequer George Osborne last November.
BBA Executive Director Simon Hills greeting the FPC proposals positively. "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," Hills said. "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."
On the London Stock Exchange, the FTSE 350 banking sector index closed up 2.9%, the second best performing sector index after technology, hardware and equipment.
RBS shares closed up 6.2% Friday at 388.00 pence, while Barclays ended up 8.2% at 240.80p, Lloyds up 2.6% at 77.11p, and HSBC up 1.7% at 639.69p.
By Samuel Agini; samagini@alliancenews.com; @samuelagini
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Barclays (BARC)
Lloyds (LLOY)
HSBC Holdings (HSBA)