Banks must report leverage ratios by 2013, warns new super-regulator

Financial Policy Committee wants the true extent of lending made clear to investors

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 services 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 to investors 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 from other financial firms.

At the moment, banks are obliged to disclose only their capital ratios, which show how much capital financial institutions hold against certain "risk-weighted" assets. Government bonds – including the securities of Greece, Portugal and Ireland – are not presently risk-weighted, which means that banks do not need to hold capital against them (though some choose to do so). The FPC said that the failure in October of the Belgian bank Dexia – which had high reported capital levels – signalled the importance of looking beyond capital ratios, which are complicated to calculate, to examine simpler indicators such as leverage.

The new international Basel III banking rules will require institutions to calculate their leverage ratios by 2013 and disclose 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 in the years leading up to the 2008 financial crisis, which helped to make them more vulnerable when the US subprime-lending bubble burst. Royal Bank of Scotland (RBS) had a leverage ratio of 31.2 in 2007, meaning that 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, a sum equivalent to 32.6 of its equity. Barclays wrote down assets worth $22.9bn, equal to 56.6 of its equity. The leverage ratio of HSBC, by contrast, was a comparatively conservative 21.3. And the asset write-downs of that lender were also smaller, at $9.4bn.

Research by Andy Haldane, the Bank of England's executive director of financial stability, also shows that these leverage ratios were increasing rapidly in the years leading up to 2007, which, he argues, should have set off warning signals among regulators. RBS's leverage ratio increased by 22.1 per cent between 2004 and 2007. Barclays' ratio increased by 36.4 per cent over the same period. The leverage ratio at some large European banks was even greater going into the 2008 crisis. The Swiss bank UBS had leveraged its capital base 58.1 times. Deutsche Bank's leverage ratio was 52.1.

Currently, the FPC has only an advisory role, but new legislation will make it Britain's top financial-regulation body from the start of 2013.

Suggested Topics
PROMOTED VIDEO
Voices
Funds raised from the sale of poppies help the members of the armed forces with financial difficulties
voicesLindsey German: The best way of protecting soldiers is to stop sending them into disastrous conflicts
Voices
Nigel Farage has backed DJ Mike Read's new Ukip song
voicesNigel Farage: Where is the Left’s outrage over the sexual abuse of girls in the North of England?
News
i100
Arts and Entertainment
Taylor Swift performs at the 2014 iHeart Radio Music Festival
musicReview: 1989's songs attempt to encapsulate dramatic emotional change in a few striking lines
News
Mario Balotelli has been accused of 'threateningly' telling a woman to stop photographing his Ferrari
peoplePolice investigate claim Balotelli acted 'threateningly' towards a woman photographing his Ferrari
Arts and Entertainment
Paul Anderson plays Arthur Shelby in Peaky Blinders series two
tvReview: Arthur Shelby Jr seems to be losing his mind as his younger brother lets him run riot in London
News
ebooksAn unforgettable anthology of contemporary reportage
Voices
Don’t try this at home: DIY has now fallen out of favour
voicesNick Harding, who never did know his awl from his elbow, is glad to see the back of it
Arts and Entertainment
Miranda Hart has called time on her award-winning BBC sitcom, Miranda
tv
Sport
Phil Jones (left) attempts to stop the progress of West Bromwich Albion’s James Morrison on Monday
I'm not worried about United's defence - Chelsea test can be the making of Jones and Rojo
Arts and Entertainment
Saw point: Bradley Cooper and Jennifer Lawrence in ‘Serena’
filmReview: Serena is a strangely dour and downbeat affair
Life and Style
The Zinger Double Down King, which is a bun-less burger released in Korea
food + drinkKFC unveils breadless meat beast
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Markit EDM (CADIS) Developer

£50000 - £90000 per annum + benefits: Ampersand Consulting LLP: Markit EDM (CA...

SQL Developer with T-SQL, Watford, Hertfordshire - £350 - £360

£350 - £360 per day: Ashdown Group: SQL Developer with T-SQL, Watford, Hertfor...

Chief Financial Officer

120-150k: Accountancy Action: We are looking for an experienced CFO from a min...

IT Systems Business Analyst - Watford - £28k + bonus + benefits

£24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...

Day In a Page

Wilko Johnson, now the bad news: musician splits with manager after police investigate assault claims

Wilko Johnson, now the bad news

Former Dr Feelgood splits with manager after police investigate assault claims
Mark Udall: The Democrat Senator with a fight on his hands ahead of the US midterm elections

Mark Udall: The Democrat Senator with a fight on his hands

The Senator for Colorado is for gay rights, for abortion rights – and in the Republicans’ sights as they threaten to take control of the Senate next month
New discoveries show more contact between far-flung prehistoric humans than had been thought

New discoveries show more contact between far-flung prehistoric humans than had been thought

Evidence found of contact between Easter Islanders and South America
Cerys Matthews reveals how her uncle taped 150 interviews for a biography of Dylan Thomas

Cerys Matthews on Dylan Thomas

The singer reveals how her uncle taped 150 interviews for a biography of the famous Welsh poet
DIY is not fun and we've finally realised this as a nation

Homebase closures: 'DIY is not fun'

Homebase has announced the closure of one in four of its stores. Nick Harding, who never did know his awl from his elbow, is glad to see the back of DIY
The Battle of the Five Armies: Air New Zealand releases new Hobbit-inspired in-flight video

Air New Zealand's wizard in-flight video

The airline has released a new Hobbit-inspired clip dubbed "The most epic safety video ever made"
Pumpkin spice is the flavour of the month - but can you stomach the sweetness?

Pumpkin spice is the flavour of the month

The combination of cinnamon, clove, nutmeg (and no actual pumpkin), now flavours everything from lattes to cream cheese in the US
11 best sonic skincare brushes

11 best sonic skincare brushes

Forget the flannel - take skincare to the next level by using your favourite cleanser with a sonic facial brush
Paul Scholes column: I'm not worried about Manchester United's defence - Chelsea test can be the making of Phil Jones and Marcos Rojo

Paul Scholes column

I'm not worried about Manchester United's defence - Chelsea test can be the making of Jones and Rojo
Frank Warren: Boxing has its problems but in all my time I've never seen a crooked fight

Frank Warren: Boxing has its problems but in all my time I've never seen a crooked fight

While other sports are stalked by corruption, we are an easy target for the critics
Jamie Roberts exclusive interview: 'I'm a man of my word – I'll stay in Paris'

Jamie Roberts: 'I'm a man of my word – I'll stay in Paris'

Wales centre says he’s not coming home but is looking to establish himself at Racing Métro
How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?

A crime that reveals London's dark heart

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?
Meet 'Porridge' and 'Vampire': Chinese state TV is offering advice for citizens picking a Western moniker

Lost in translation: Western monikers

Chinese state TV is offering advice for citizens picking a Western moniker. Simon Usborne, who met a 'Porridge' and a 'Vampire' while in China, can see the problem
Handy hacks that make life easier: New book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone

Handy hacks that make life easier

New book reveals how to rid your email inbox of spam, protect your passwords and amplify your iPhone with a loo-roll
KidZania lets children try their hands at being a firefighter, doctor or factory worker for the day

KidZania: It's a small world

The new 'educational entertainment experience' in London's Shepherd's Bush will allow children to try out the jobs that are usually undertaken by adults, including firefighter, doctor or factory worker