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BoE to review its powers to curb bank risk-taking

Mark Carney
Toby Melville | Getty Images
Mark Carney

The Bank of England (BoE) will launch a review into whether it should have more power over leverage ratios - a key way of limiting the size of balance sheets - at U.K. banks.

Speaking in front of the Treasury Select Committee of British lawmakers on Tuesday, BoE Governor Mark Carney said leverage ratios - which are the ratio of equity to debt - were "integral to the capital framework of banks."

The former Governor of the Bank of Canada added: "If I could pick one element that was essential to the performance of the Canadian banking system during the crisis it was the presence of a leverage ratio."

"We see that this power is consistent and in fact necessary to properly implement a robust capital framework in the United Kingdom."

His comments came after an exchange of letters between Carney and British Chancellor George Osborne, who requested that the BoE's Financial Policy Committee (FPC) carry out the review.

(Read more: BoE upgrades growth forecasts as recovery takes hold)

"Now is an appropriate time for the FPC to consider whether and when it needs any additional powers of direction over the leverage ratio, how it should use these powers and how any new powers would fit in with the rest of its macro-prudential 'tool-kit'," Osborne wrote.

He added that "much greater certainty on the medium term capital framework for U.K. banks" was needed.

At the moment, the FPC - which oversees the regulation of the U.K. financial system - is not able to change the leverage ratio. The committee will provide a report into the issue within 12 months, Carney said.

Ratio timetable

Details of the leverage ratio are due to be agreed internationally by the Basel Committee on Banking Supervision early in the New Year, and will become mandatory on January 1, 2018. However, Osborne wrote that he was open to the possibility that the FPC may need the power to implement a ratio ahead of this time frame.

The review comes amid much uncertainty at British banks about what capital ratios will be required. A source at one bank, who did not want to be named, said their bank had prepared for five different scenarios to be announced.

Mike Trippitt, banks analyst at Numis Securities, told CNBC: "There are some scenarios where it could be as high as 13 percent, but I think that's far-fetched."

"It feels like the Royal Bank of Scotland gave us the answer when it announced the bad bank, with a 12 percent ratio," he added.

(Read more: Bank of England: 2014 rate rise very unlikely)

Leverage ratios are part of a wider set of banking reform measures - known as Basel III - which is due to come into effect at the start of 2019.

It aims to strengthen the banking industry following the financial crisis of 2008 which saw a number of big banks – such as Lehman Brothers – collapse. Many others received state aid after being deemed "too big to fail" – meaning that if they went under they would significantly damage the wider banking industry and economy.

Carney quizzed

Also on Tuesday, Carney was questioned by the Treasury Select Committee about the BoE's recent inflation report.

The central bank chief criticized the quality of some economic data for the U.K., and said that a lot of work needed to be done to bring some statistics up to international standards.

"We have put cautionary language in our reports in August and in November in terms of how much weight we're putting on that data," he said.

"We're not putting full weight on that data and it has to be said that it doesn't entirely feel right that investment is, as measured, falling at a time when we see continued strengthening investment intention."

(Read more: Bank of England sees 'uncertainties' in recovery)

He added that he was "much more comfortable" with the economic data in Canada.

Minutes of the BoE's most recent policy meeting, published last week, revealed a notably cautious tone - which contrasted with its latest quarterly Inflation Report, when it updated its growth, inflation and unemployment forecasts for the U.K.

The bank has previously given guidance that it would not consider raising the main interest rate (Bank Rate) from its current 0.5 percent until the jobless rate falls to 7 percent

But on Tuesday, Carney stressed that "7 percent is a threshold, not a trigger," indicating again that the central bank is in no rush to hike rates.

The BoE's Deputy Governor of Monetary Policy Charlie Bean, Executive Director and Chief Economist Spencer Dale and Monetary Policy Committee member Ben Broadbent, also testified in front of the Parliament committee.

By CNBC's Katrina Bishop. Follow her on Twitter @KatrinaBishop and Google

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