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
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
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