If U.K. Can Make Leverage Ratio Changes, Why Can’t U.S.?
By John Heltman
WASHINGTON — U.S. banks are applauding a move by the Bank of England this week to exempt excess reserves from consideration as part of the country’s leverage-based capital rules in hopes that the Federal Reserve and other domestic regulators might follow suit. The Bank of England’s Financial Policy Committee on Thursday recommended that the Prudential Regulatory Authority allow banks to exclude excess reserves on deposit with the central bank as part of their total assets in the calculation of the leverage ratio. The agency argued that reserves kept at the central bank hold as little risk as possible and therefore the change would not impact financial stability… Karen Shaw Petrou, managing partner at Federal Financial Analytics, said the change in the U.K. treatment of reserves might turn heads among bank regulators, who understand the banks’ concerns but have kept the calculations as they are for practical and political reasons. On the one hand, the Fed’s payment of interest on excess reserves has been the subject ofcriticism from lawmakers from both political parties, and House Democratsonly recentlyjoined with Fed Chair Janet Yellen in her defense of the policy. “The politics are really the problem,” Petrou said. “I don’t think the Fed denies the logic of removing excess reserves. Once they start taking one thing out, does the whole edifice fall out? The leverage ratio is fundamentally illogical in many ways — it has a lot of perverse consequences.”