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Mortgage costs could rise as Bank of England introduces tough safety nets for banks
Bank's Financial Policy Committee will announce leverage ratio rules on Friday afternoon
The Bank will unveil the rules on Friday afternoon
By James Titcomb
9:55PM GMT 30 Oct 2014
25 Comments
Britain's banks will be forced to maintain significant financial safety nets under rules announced on Friday that industry leaders say could raise the cost of mortgages and penalise building societies.
The Bank of England is expected to go beyond global standards in revealing the leverage ratio – the level of financial reserves banks must hold to protect against a downturn – it expects banks to adopt.
Banking sources expect the Financial Policy Committee (FPC) to announce a leverage ratio of between 4pc and 5pc for “systemically-important” banks, compared to a 3pc floor proposed by the Basel Committee on Banking Supervision, the international watchdog. A 4pc ratio means they must hold £1 in reserve for every £25 of lending.
The leverage ratio is one of the key pillars of regulators’ attempts to strengthen the financial sector in the wake of the financial crisis.
Industry groups have warned that burdensome measures would increase the cost of mortgage repayments and encourage risky lending. Unlike capital ratios – the current standard of a bank’s financial buffers – leverage ratios are not adjusted for the safety of a bank’s loans.
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“It is likely for quite a number of banks that the leverage ratio, rather than just a backstop to the [current] capital rules, will become the limiting constraint [on lending],” said Benedict James, a banking partner at Linklaters.
In introducing stricter measures than Basel, the Bank follows in the footsteps of regulators in Switzerland, the US and the Netherlands, which are bringing in ratios of 4pc and above.
Leverage ratios are particularly punitive on big mortgage lenders, since home loans are classed as relatively safe under the measures of financial safety that are adjusted for risk.
Lloyds, the UK’s largest mortgage lender, said earlier this week that a tough leverage ratio “will have an immediate impact… on pricing [of mortgages]”. The British Bankers’ Association has said tough rules “could create perverse effects, such as incentivising banks to increase the cost of new mortgages or even to engage in higher risk lending”.
“If it were 4pc or above... it would have adverse implications for building societies and the pricing of mortgages. I think you’re talking about tens of basis points,” said Ian Gordon, a banking analyst at Investec. Banks’ expectations about the leverage ratio have already increased the cost of mortgages in the last year, Mr Gordon said.
The Bank itself has said that building societies – which are by their nature more exposed to mortgages than banks – could disproportionately suffer. “Increasing capital levels without diversifying business mix might result in higher lending rates on mortgages in the short term, to the extent that any higher funding costs are passed on to consumers,” the FPC said in a consultation paper in July.
The Bank of England is expected to set a base leverage ratio and an additional buffer for larger banks, as well as a “counter-cyclical” component that would be introduced if the market becomes overheated.
Banks are also on alert over what deadline the FPC tells lenders to get into shape by, as well as what quality of capital is deemed adequate by the Bank.
Bank's Financial Policy Committee will announce leverage ratio rules on Friday afternoon
The Bank will unveil the rules on Friday afternoon By James Titcomb
9:55PM GMT 30 Oct 2014
25 Comments Britain's banks will be forced to maintain significant financial safety nets under rules announced on Friday that industry leaders say could raise the cost of mortgages and penalise building societies.
The Bank of England is expected to go beyond global standards in revealing the leverage ratio – the level of financial reserves banks must hold to protect against a downturn – it expects banks to adopt.
Banking sources expect the Financial Policy Committee (FPC) to announce a leverage ratio of between 4pc and 5pc for “systemically-important” banks, compared to a 3pc floor proposed by the Basel Committee on Banking Supervision, the international watchdog. A 4pc ratio means they must hold £1 in reserve for every £25 of lending.
The leverage ratio is one of the key pillars of regulators’ attempts to strengthen the financial sector in the wake of the financial crisis.
Industry groups have warned that burdensome measures would increase the cost of mortgage repayments and encourage risky lending. Unlike capital ratios – the current standard of a bank’s financial buffers – leverage ratios are not adjusted for the safety of a bank’s loans.
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“It is likely for quite a number of banks that the leverage ratio, rather than just a backstop to the [current] capital rules, will become the limiting constraint [on lending],” said Benedict James, a banking partner at Linklaters.
In introducing stricter measures than Basel, the Bank follows in the footsteps of regulators in Switzerland, the US and the Netherlands, which are bringing in ratios of 4pc and above.
Leverage ratios are particularly punitive on big mortgage lenders, since home loans are classed as relatively safe under the measures of financial safety that are adjusted for risk.
Lloyds, the UK’s largest mortgage lender, said earlier this week that a tough leverage ratio “will have an immediate impact… on pricing [of mortgages]”. The British Bankers’ Association has said tough rules “could create perverse effects, such as incentivising banks to increase the cost of new mortgages or even to engage in higher risk lending”.
“If it were 4pc or above... it would have adverse implications for building societies and the pricing of mortgages. I think you’re talking about tens of basis points,” said Ian Gordon, a banking analyst at Investec. Banks’ expectations about the leverage ratio have already increased the cost of mortgages in the last year, Mr Gordon said.
The Bank itself has said that building societies – which are by their nature more exposed to mortgages than banks – could disproportionately suffer. “Increasing capital levels without diversifying business mix might result in higher lending rates on mortgages in the short term, to the extent that any higher funding costs are passed on to consumers,” the FPC said in a consultation paper in July.
The Bank of England is expected to set a base leverage ratio and an additional buffer for larger banks, as well as a “counter-cyclical” component that would be introduced if the market becomes overheated.
Banks are also on alert over what deadline the FPC tells lenders to get into shape by, as well as what quality of capital is deemed adequate by the Bank.