Mark Carney 'sees logic' in tougher cap on banks' leverage

Incoming Bank Governor in conflict with Chancellor on the size of equity buffers

Mark Carney has backed the Independent Commission on Banking (ICB) over the Chancellor, George Osborne, on the question of what leverage caps ought to be imposed on British banks.

The incoming governor of the Bank of England was asked at a Treasury Select Committee hearing whether he agreed with the ICB, chaired by Sir John Vickers, that banks should be required to maintain equity buffers of a least 4 per cent of assets, which would cap their leverage at 25.

"I agree with that logic" replied Mr Carney, who said that he had discussed the matter with Sir John.

Mr Osborne, however, proposes allowing banks to run on equity buffers of just 3 per cent, which would permit them to leverage up to 33, in the new Financial Services Bill. He has argued it would be too expensive for the banks to impose the tougher leverage cap.

Mr Carney said that if the higher leverage ratio was permitted the Bank of England, which takes over full regulatory control of the financial sector later this year, would need to pay closer attention to banks' balance sheets.

"I understand that is not currently in the bill" Mr Carney said. "To address the risk, higher supervisory scrutiny of what are low-risk assets [will be required]."

Mr Carney told the committee that Canadian banks are required to respect a leverage cap of 20, meaning that they must maintain equity buffers of at least 5 per cent. He described this as one of the reasons why the Canadian financial sector passed safely through the 2007-08 global financial crisis. "If I had to pick one reason why Canadian banks fared as well as they did, it was because we had a leverage ratio," he said.

As well as distancing himself from previous hints that he might support a nominal gross domestic product target for the Bank of England, Mr Carney rejected the proposal floated by the chairman of the Financial Services Authority, Lord Turner, this week that the Bank should consider monetising the Government's deficit to jump-start growth.

"I cannot envisage any circumstances when I could support that as a strategy," he told MPs.

However, Mr Carney also said that one of the Bank's existing monetary stimulus tools, quantitative easing (QE), was running out of power.

"Research at the Bank of Canada suggests that the returns to QE have declined," he said. This contrasts with the view of most members of the Bank of England's Monetary Policy Committee, who have long maintained that QE retains its ability to boost demand.

In another sign of fresh thinking from the incoming governor, he said that the rate-setting MPC holds an excessive number of meetings each year. It meets once a month, in contrast to the board of the Bank of Canada and the US Federal Reserve which meet just eight times a year. "It verges on too many," said Mr Carney of the MPC's annual meeting schedule.

MPC set for a slow recovery

The Bank of England said it was braced for a "slow but sustained" recovery but persistently high inflation as it maintained the scale of its money-printing programme at £375bn.

In a rare statement with its no-change decision, the Monetary Policy Committee said it was reinvesting the proceeds of £6.6bn in maturing gilts bought by the Bank when it began quantitative easing in 2009.

The committee held interest rates at their record low 0.5 per cent. It is braced for inflation to stay above 2 per cent for the next two years. The European Central Bank also kept interest rates on hold at 0.75 per cent.

Russell Lynch