Banking Commission urges Govt to increase ‘extremely weak’ leverage rules

The Parliamentary Commission on Banking Standards says the minimum leverage ratio banks will have to adhere to as part of the Government’s proposed reform to the banking sector is “extremely weak” and has called for an increase above the new global benchmark.

Andrew Tyrie BBA Conference 2012 480

In a second report into banking reform, published today, on the same day the Banking Reform Bill will receive its second reading in the House of Commons, the committee says the proposed leverage ratio of 3 per cent, which is in line with Basel III rules, is “too low” and should be increased. The original Vickers review recommended a leverage ratio of at least 4 per cent. The leverage ratio is how much banks are allowed to borrow against their capital, so, for example, at 3 per cent banks will be allowed to borrow £33 for every £1 of capital they hold.

PCBS chairman Andrew Tyrie says: “There remains much more work to be done to improve the Bill. In particular, the Financial Policy Committee should immediately be given the duty of setting the leverage ratio. Almost certainly, a leverage ratio of 3 per cent is too low.”

The commission, in its first report into banking reform, called for the Government to “electrify” the ringfence of banks’ retail and investment arms with the addition of reserve powers to implement full separation of retail and investment activities across the industry.

The Government has agreed to implement a first reserve power, which allows it to split up an individual bank if it does not adhere to the new rules, however the committee is calling on the Government to implement a statutory provision for industry-wide separation if the ring-fence is seen to be failing.

Tyrie says: “The Bill would be strengthened by making specific provision to consider the case for full, industry-wide separation if the ring-fence is judged to be failing.

“As is appropriate, the final decision would lie with the Government and Parliament and not with the regulator.”