Osborne questions impact of BoE's new regulations

George Osborne has urged the Bank of England (BoE) to consider the impact toughening the regulatory regime for banks would have on lending to households and business.

The system would prevent the UK’s major lenders from hiding the risks they could face when granting loans to households and businesses, with the BoE requiring the biggest banks to hold 3p of capital for every £1 they lend out by imposing a 3% leverage ratio across the industry almost immediately.

Unlike the capital ratios which allow banks to make an assessment of the risk they face, the leverage ratio – a way of measuring a bank’s financial strength – does not allow lenders to make assessments about the risks they might encounter.

Banks such as Royal Bank of Scotland and Barclays could be hit with an even higher average ratio from next year, as the BoE considers push the level up to just over 4%.

Were the BoE to decide that markets were becoming exuberant another component could be added to the leverage ratio, pushing the maximum leverage ratio to 4.95%

While he said he “fully accepts” the logic for an extra component to be added to the 3% level, the chancellor warned that work needed to be done on understanding what the impact might be on banks and large building societies.

Osborne said the Financial Policy Committee’s (FPC) new consultation on imposing any extra layer to the ratio should look at “levels of lending to the real economy, the degree of competition in retail banking”.

“The FPC believes that its proposals for the design and calibration of the framework will lead to prudent and efficient leverage ratio requirements for the UK financial system,” the BoE’s governor Mark Carney told Osborne.

The BoE said publishing a series of complex formulas to regulate the banking sector would not impact the cost of borrowing for consumers.

“The leverage ratio is not expected to be binding capital constraint on the majority of lenders, which might suggest that the effects, if any, on pricing in the wider market for low LTV mortgages, are likely to be quite small,” the FPC said.

“The committee noted that peak losses of most UK banks during the crisis would have been absorbed by capital if a leverage requirement of 3% had been in place.

“Some firms lost more, however, and for the FPC it was important – particularly for the largest firms that they were viable after sustaining losses so that they could continue support lending to the real economy.”