Bank of England sets out new leverage rules for banks

LONDON, Oct 31 (Reuters) - British lenders may have to holdmore capital to guard against risks of bad loans and otherlosses in the latest move by the Bank of England to reduce thechances of banks needing public bailouts.

The central bank said on Friday that banks' requiredleverage ratio - the minimum amount of capital they must holdrelative to their exposure to loans that could fall in value -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 forevery 20 pounds they lend, compared to 1 pound for every 33pounds under current leverage rules.

"The Committee believes that its proposals for the designand calibration of the framework will lead to prudent andefficient leverage ratio requirements," Governor Mark Carneysaid in a letter to finance minister George Osborne.

Osborne needs to approve the proposals, and set in responsethat there would need to be further consultation with bankslenders on the impact of a higher leverage ratio.

The BoE set 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 creditcycle, and other issues that have not been finalised.

As a result, the minimum leverage ratio for most banks islikely to be far lower than 4.95 percent. If the economy isregarded as weak and lending prudent, the leverage ratio wouldonly go as high as 4.05 percent.

Banking sources had expected the ratio to be increased tobetween 4 percent and 5 percent, which analysts said banks canadapt to as long as they had several years to reach it.

The BoE's proposal is the latest in a series of steps sincethe financial crisis aimed at making banks protect themselvesbetter against future risks and avoiding a repeat of the 66billion pound ($105 billion) taxpayer bailout of Royal Bank ofScotland and Lloyds Banking Group.

Banks have argued that Britain is going too far beyondglobal rules, and that forcing them to hold excess capitalreduces their profits, pushes up the cost of lending and couldcut the amount of credit available to home-buyers and companies.

The BoE says safer banks will find it cheaper to raisefunds, and that large banks that operate with dangerously lowlevels of capital effectively receive a public subsidy becauseinvestors think taxpayers will step in to stop them failing.

(1 US dollar = 0.6260 British pound) (Reporting by Steve Slater and David Milliken)