Time for the Bank of England to show a steady hand

Fri Jul 25, 2014 11:58am EDT

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LONDON, July 25 (IFR) - The Bank of England's latest curveball on the leverage ratio muddles the waters further in what is already a fiendishly complicated UK bank capital framework.

Just when UK banks thought it was safe to make capital plans, the Financial Policy Committee has entered into a review of the leverage ratio that could prove yet more onerous than the 3% imposed upon them just over a year ago.

Under its latest proposals that 3% could become 5.75%, with the largest chunk to be met with Common Equity Tier 1.

No one can blame the regulator for trying to make financial institutions stronger, and sympathy for UK banks is in short supply these days. Yet the Bank of England risks being seen as whimsical if it keeps moving the goal posts in unsettling and seriously complicated ways.

Instead of a simple division of total exposure by total capital, the Bank is suggesting the leverage ratio should have various components including a minimum leverage ratio, a leverage conservation buffer, a supplementary leverage ratio and a time-varying leverage ratio.

It could turn what is meant to be a simple measure of bank strength into a complicated system that effectively mirrors the current risk-weighted capital framework.

The contrast to the approach of Switzerland - where banks have proved big and troublesome and given politicians and the regulator a major headache - could not be starker.

Total banking assets in Switzerland are 469% of GDP versus the UK's 499%. And yet the Swiss Financial Market Supervisory Authority (FINMA) has shown a steady hand with the new regulatory framework. While burdensome, the so-called Swiss finish is clear: banks need to have a total of 19% capital, with at least 10% of that held in Common Equity.

Meanwhile, the country has been applying a leverage ratio to systemically important banks since January 2013, which requires banks to meet a target of between 3.1% and 4.56%.

So Swiss banks have enjoyed a clear path and end point.

Compare this approach to that taken in the UK where you have various regulatory iterations such as ring-fencing, GLAC and PLAC making it difficult to know where things stand. This constantly changing regulatory alphabet soup is confusing, baffling and cumbersome to track.

No one is saying that regulators should not be tough, but without a clear path how can banks be expected to make effective plans?

What the Bank of England has laid out is far more complicated that what is currently required by either Basel or the European Union.

So the Bank's optimist view that it could consult the market quickly has quickly proven to be misguided, and it has had to extend talks by four weeks to mid-September.

While there was uproar when FINMA set its requirements back in 2010 because it was being so stringent, at least banks were able to get on and make their capital plans. It's about time the UK took some inspiration from the Swiss. (Reporting by Helene Durand, Editing by Alex Chambers, Julian Baker)

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