George Osborne, the U.K.’s Chancellor of the Exchequer, requested late last month that the Financial Policy Committee conduct a review of the role leverage ratio standards play at U.K. banks.
“The FPC will be finalizing the capital framework for U.K. banks over the next 12-18 months, and the leverage ratio will be a critical part of the capital framework for banks,” Osborne said in a Tuesday letter to Mark Carney, the governor of the Bank of England. “Although not widely appreciated, the FPC can make recommendations to the Prudential Regulatory Authority in respect of the leverage ratio, and the PRA can set the leverage ratio… However, the FPC does not yet have a formal power of direction over the leverage ratio, either to set the baseline minimum level or the power to vary this level over time.”
Osborne said the FPC needs to consider “whether and when” it requires any additional “powers of direction” over the leverage ratio, how it would use the powers and how any new powers would assist the committee in fulfilling its mission.
Additionally, Osborne said that while he is open to recommendations that the FPC might need the power to implement a leverage ratio ahead of the current timetable, he wants “clear evidence” on how early implementation would contribute to the FPC’s primary goal of securing the U.K.’s financial stability.
In his response, Carney agreed with Osborne’s assessment that now is the right time for such a review, adding that the leverage ratio standard cannot be set until exact definitions are finalized by the Basel Committee in the new year.
“It is…crucial that we have an appropriately calibrated minimum leverage ratio for U.K. banks,” Carney said. “Were the FPC to direct the regulators to increase risk-weighted standards without a proportionate increase in the leverage standard, there would be an incentive for banks to concentrate their balance sheets in apparently low-risk assets, or to understate the risks on existing assets.”
The FPC will complete its review within a year, and late last month, it published considerations on the role of the leverage ratio in U.K. banks’ capital framework.