Banks pressurised to meet debt targets

Experts have said banks will struggle to meet targets set by the Bank of England as pressure mounts on the institution to enforce debt controls.

Chancellor George Osborne wrote to the Bank’s governor, Mark Carney, to launch an inquiry in to whether the Financial Policy Committee (FPC) should have formalised control over the amount of capital banks need to maintain.

Barclays and Nationwide have already come under fire following stress testing, which led the government to deem the companies needed to reduce their debt levels. But the chancellor is proposing sector-wide controls of debt leveraging earlier than scheduled.

Article continues after advert

“Now is the appropriate time for the FPC to consider whether and when it needs any additional powers of direction over the leverage ratio, how it should use these additional powers, and how any new powers would fit in with the rest of its macro-prudential ‘tool-kit,” Mr Osborne said.

Mr Carney agreed that “the time is now right to consider such a review”.

“If I were to choose just one reason why Canadian banks fared as they did through the crisis, it would be because they were subject to a leverage standard,” he said.

“It is, therefore, crucial that we have an appropriately calibrated minimum leverage ratio for UK banks.”

Simon Ward, chief economist at Henderson Global Investors, said he was in favour of the measures, which the FPC could use to force banks to reduce their debt levels if they were “going back to their bad old ways of over-lending”.

But he said he thought it would be better to wait for international standards to be put in place, rather than “gold plating” UK rules, and suggested the letter was political grandstanding on Mr Osborne’s part to “give an impression he is coming down on these irresponsible bankers”.

Ed Salvesen, deputy head of equity research at Brewin Dolphin, was also positive on the move which he said “would increase the stability of UK banking,” although he thought some banks could struggle to reach the required ratios.

“There will be severe consequences for the UK-exposed banks if there is an increase in leverage ratio – they would be under a degree of pressure,” he said.

However, he added if the FPC enforced leverage ratios this could be positive for UK banks because it would be clear what was required of them.

But David Tinsley, UK economist at BNP Paribas, added there could be a risk the move would be one towards overregulation in reaction to the crisis.

“You could always argue for banks to hold more equity and more capital but the question is, what are you trading that off against?” he said.

“You are trading it against the ability of institutions to take risks. That is exactly the idea, of course, but a certain amount of risk taking is a good thing – it helps produce profitable investments.”