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.