LONDON The Bank of England (BoE) proposed on Friday that Britain's biggest banks should set aside from 2019 more capital than planned under global rules being drawn up to prevent a repeat of the financial crisis.
Launching a public consultation on a new leverage ratio - the amount of capital a bank has to hold as a percentage of total assets - the BoE said many financial institutions may have to set aside funds on top of a global minimum that has yet to be fully agreed.
A leverage ratio of 3 percent, the provisional global level, means a bank must hold capital equivalent to 3 percent of its total assets, regardless of how risky they are.
"There may be a case to introduce a supplementary leverage ratio component to a subset of firms, for example ring-fenced banks and/or systemically important institutions, whose failure would be most destabilizing for the financial system," the BoE said in a consultation paper.
This would cover the bulk of Britain's banks as they have already been deemed to require a ring-fence of extra capital to protect depositors, hold extra capital because of their size, or both.
The BoE is proposing two types of supplements, a permanent one for some lenders, and a temporary one to cool credit booms. Some banks would have to comply with both in some circumstances.
The supplements may have to comprise the most expensive form of capital, thereby putting limits on a bank's ability to use cheaper hybrid debt known as contingent capital or Cocos.
Members of parliament's influential treasury committee want a minimum leverage ratio of 4 percent or above, saying tougher measures are needed to ensure taxpayers are not asked to bail out banks like in the financial crisis.
British banks such as Barclays (BARC.L), HSBC (HSBA.L), Lloyds (LLOY.L) and RBS (RBS.L) already have to meet a 3 percent target, forcing some to raise more capital.
The British Bankers' Association (BBA) said the proposals complicated global plans for a simple, internationally harmonized leverage ratio.
"Adding in complexity runs the risk of creating its own distortions and penalizing safer lending. Our members will work with the regulator to identify problematic areas a more complex leverage ratio would introduce," Simon Hills, an executive director at the BBA, said in a statement.
BoE Governor Mark Carney has previously said that 3 percent might not be high enough but the consultation paper did not propose any specific figures for what the leverage ratio, including any supplements, should be.
The impact of a tougher leverage ratio won't be known until the BoE sets actual levels later on and details phase-in periods.
The consultation suggests alternatives to a supplement, such as a floor or minimum capital for particular assets.
GOING TOO FAR?
Global banking regulators on the Basel Committee have agreed to introduce a leverage ratio for banks across the world, and the BoE will use the committee's definition of a leverage ratio for supplements.
Basel is not due to agree on the level of a leverage ratio for the industry worldwide until 2017, and it will be enforced from January 2018. There are splits among its members over whether 3 percent is high enough.
The committee describes the world's first common leverage ratio as a backstop to a bank's core measure of capital which is calculated in relation to riskiness of assets.
"The Bank of England's proposals go too far. This moves away from (the) simple backstop notion in Basel," a UK banking industry official said. The U.S. Federal Reserve has already insisted on a leverage ratio of 5 percent and above for U.S. banks, and investors may want to see that all big banks globally are equally strong.
"Where the Americans go, we tend to follow. It's got to be a decent bet that this is where we all end up," said Simon Gleeson, a financial lawyer at Clifford Chance
The discussions over the leverage ratio have become increasingly charged as many regulators no longer fully trust the way banks calculate their main core capital buffers. They are based on only risk-weighted assets, the value of which is open to debate.
The consultation is due to run until Aug. 14. A final review is due to be published in November.
(Reporting by Huw Jones; Editing by William Schomberg, John Stonestreet and Mark Potter)