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Banks: Finance

Treasury written question – answered on 2nd November 2011.

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Photo of Owen Smith Owen Smith Labour, Pontypridd

To ask the Chancellor of the Exchequer what recent assessment he has made of the optimal leverage ratio for UK banks.

Photo of Mark Hoban Mark Hoban The Financial Secretary to the Treasury

The optimal level of leverage will depend on the risk profile of the assets and exposures which vary from bank to bank and over time. Given a lack of consistent time series data and the presence of varying bank business models, it is not possible to determine with a high level of confidence an optimal leverage ratio for a wide range of banks and over an extended period of time. However there is evidence that banks can be excessively leveraged and the Basel Committee on Banking Supervision (BCBS) has published relevant analysis, indicating that banks which had particularly high levels of leverage prior to the financial crisis were more likely to experience stress during that period. Further details of the BCBS's analysis can be found at:

http://www.bis.org/publ/bcbs180.pdf

As part of the Basel III agreement, the Basel Committee on Banking Supervision agreed to introduce a non-risked based leverage ratio to constrain the build-up of leverage in the banking sector and provide a backstop to risk weight based capital requirements. This will help reduce the leverage ratio for banks to a more sustainable level. In the EU, Basel III will be implemented through legislation on prudential requirements for credit institutions and investment firms, which the Commission adopted proposals for on 20 July 2011.

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