Osborne opens door to Bank powers to set leverage levels

Chancellor George Osborne has opened the door to handing new powers to the Bank of England’s Financial Policy Committee to have a ‘formal power of direction’ over leverage levels at UK banks.

In an exchange of letters between the chancellor and Mark Carney, governor of the Bank of England, Mr Osborne flags up an FPC review into the overall capital framework for UK banks and states that now is an “appropriate time” to consider whether additional direction powers are required.

Mr Carney’s response reiterates his view, outlined to the Treasury Select Committee during an evidence session in February, that a minimum leverage ratio is a “vital component” of the capital framework.

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Mr Carney had previously stated this was one reason why Canadian banks fared so well through the global financial crisis.

The Financial Policy Committee is part of the tripartite regulatory regime. It sits within the Bank of England and has ‘comply or explain’ powers to make recommendations to the Prudential Regulation Authority, which regulates banks, insurers and larger financial institutions.

While the FPC can make recommendations to the Prudential Regulation Authority in respect of the leverage ratio, it stops short of having 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.

Mr Osborne states in his letter that the FPC should consider whether it needs any powers of direction over the leverage ratio, adding that he believes the UK should apply the “international standard for the level of the baseline leverage ratio, in line with the final Basel definition and calibration”.

He writes: “I am open to the review making recommendations that the FCP may need the power implement a leverage ratio ahead of this timetable or to set a higher baseline ratio in some circumstances for UK banks.”

Mr Carney adds that as well as considering the leverage standard required to ensure the system is “sufficiently resilient”, the review will also need to assess how this standard should apply to ‘ringfenced’ banks.

He states the review will be completed within a 12-month period. He says the FPC will publish “high-level considerations... on the role of the leverage ratio within the overall framework” within its Financial Stability Report, due to be published this Thursday (28 November).