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Bank of England sets out tougher leverage rules for banks

British lenders may have to hold more capital to guard against risks of bad loans and other losses in the latest move by the Bank of England to reduce the chances of banks needing public bailouts.

The central bank said on Friday that banks' required leverage ratio – the minimum amount of capital they must hold relative to their exposure to loans that could fall in value - could rise to up to 4.95 percent from 2019, from 3 percent now.

That means banks would need to hold 1 pound of capital for every 20 pounds they lend, compared to 1 pound for every 33 pounds under current leverage rules.

The Bank of England
Simon Dawson | Bloomberg | Getty Images

"The Committee believes that its proposals for the design and calibration of the framework will lead to prudent and efficient leverage ratio requirements," Governor Mark Carney said in a letter to finance minister George Osborne.

Osborne needs to approve the proposals, and set in response that there would need to be further consultation with banks lenders on the impact of a higher leverage ratio.

The BoE set a complex calculation for the leverage ratio, whereby the minimum level will be based on several factors, including the size of the bank, where Britain is in the credit cycle, and other issues that have not been finalized.

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As a result, the minimum leverage ratio for most banks is likely to be far lower than 4.95 percent. If the economy is regarded as weak and lending prudent, the leverage ratio would only go as high as 4.05 percent.

Banking sources had expected the ratio to be increased to between 4 percent and 5 percent, which analysts said banks can adapt to as long as they had several years to reach it.

The BoE's proposal is the latest in a series of steps since the financial crisis aimed at making banks protect themselves better against future risks and avoiding a repeat of the 66 billion pound ($105 billion) taxpayer bailout of Royal Bank of Scotland and Lloyds Banking Group.

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Banks have argued that Britain is going too far beyond global rules, and that forcing them to hold excess capital reduces their profits, pushes up the cost of lending and could cut the amount of credit available to home-buyers and companies.

The BoE says safer banks will find it cheaper to raise funds, and that large banks that operate with dangerously low levels of capital effectively receive a public subsidy because investors think taxpayers will step in to stop them failing.

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