British banks have been instructed to disclose their leverage ratios in reports to investors by 2013, two years earlier than planned, by the new financial ser- vices super regulator, the Financial Policy Committee (FPC). The instruction was contained in the Bank of England's twice yearly Financial Stability Report, released yesterday.
The FPC argues that the publication of a raw leverage ratio – which would show total levels of lending in relation to capital – would provide a clearer picture of the financial health of a bank. The FPC report said "opaque and overly complex regulatory risk-weight calculations and inconsistent and incomplete disclosure have increased uncertainty about bank resilience". The report also said that a lack of investor knowledge about the true state of banks' balance sheets is one of the reasons institutions are experiencing difficulties in raising money.
Banks are obliged only to disclose capital ratios, which show how much capital they hold against certain "risk-weighted" assets. Government bonds – including those of Greece, Portugal and Ireland – are not presently risk-weighted, which means that banks do not need to hold capital against them (although some choose to do so).
The new international Basel III banking rules will require institutions to calculate their leverage ratios by 2013 and disclosure the information to investors from 2015. But the FPC wants banks to start reporting these ratios as soon as they have collected the information.
British banks are generally believed to have been dangerously over-leveraged ahead of the 2008 financial crisis, which helped to make them more vulnerable when the US sub-prime lending bubble burst. The Royal Bank of Scotland had a leverage ratio of 31.2 in 2007, meaning its total assets were worth 31 times its capital. The leverage ratio at Barclays was 37.8. The former was obliged to write down $26.5bn of assets in the crisis; Barclays wrote down assets worth $22.9bn. HSBC, by contrast, has a comparatively conservative leverage ratio of 21.3. And its asset writedowns were also smaller, at $9.4bn.Reuse content