September 29, 2011 / 10:35 AM / 8 years ago

BoE's Miles: banks need far larger capital buffers

* Bank capital buffers should be 18-20 pct -Miles

* Basel III plan is for minimum 7 pct

* Extra cost would not be prohibitive -Miles

LUXEMBOURG, Sept 29 (Reuters) - Banks should have capital buffers far in excess of current levels, and more than double the minimum required under Basel III, and they could do so without dramatically raising their costs, Bank of England policymaker David Miles said on Thursday.

Miles, a member of the BoE’s monetary policy committee, believes that banks should hold 18-20 percent of risk-weighted assets in the form of equity.

“To many people these levels look ridiculously high,” Miles, who does not sit on the BoE’s Financial Policy Committee which advises British authorities on financial regulation, told the European Supervisor Education Initiative conference in Luxembourg.

“But if risk-weighted assets are, let’s say, half of total assets then in terms of overall level of funding, 20 pct relative to risk-weighted assets would be only 10 percent overall in the form of equity and 90 percent in the form of debt,” he said.

Under Basel III rules set to come into force in phases between 2013 and 2019, banks are required to have a capital coverage of 7 percent of risk-weighted assets.

Miles comments came as European Central Bank Governing Council member Ewald Nowotny, who heads Austria’s central bank, said on Thursday that Europe must take a hard line against efforts by U.S. banks to avoid implementing Basel III capital rules.

Miles declined to comment on UK monetary policy ahead of a BoE meeting next week. A Reuters poll released on Wednesday forecast the bank will launch a fresh round of quantitative easing in November.

Miles recognised that banks would face higher costs if they were required to have greater capital buffers. However, he said he was skeptical that the interest rate charged for loans would have to be so much higher.

Banks have argued that rules forcing them to hold larger amounts of equity would raise their costs, which they would have to pass on to customers, resulting in lower economic growth.

Cutting leverage from around 30 times to 15 could raise the cost of funding by 20 basis points, at most 40 basis points, he said. “This is not negligible, but is not enough to wreck the economy,” he said.

Miles said that a number of commentators had ignored the benefits of higher capital buffers — specifically, reducing the chances of financial crises.

“The more capital you have the less frequently they will come along. If you can reduce the probability happening you are reducing the probability of something extraordinarily costly.”

Equity might be more expensive than debt, but investors should also be prepared to accept a lower return for their equity if leverage fell because the risk would be lower.

Basel III was heading in the right direction, but subsequent updates of the rules should go further, he said. (Reporting By Philip Blenkinsop; Editing by Susan Fenton)

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