Post-Postcrisis—Bank of England, Again, Cuts Capital Requirements
By Ryan Tracy
U.K. regulators have once again fiddled with bank capital rules as they try to keep the country’s economy on track after the vote to exit the European Union, a move likely to further inflame the debate over postcrisis bank capital requirements. The little-noticed shift finalized Thursday lost amid the focus on the central bank’s rate cut—underscores the dilemma facing central banks struggling to balance their sometimes-competing goals of shoring up financial stability and shoring up growth. Specifically, the Bank of England’s Prudential Regulation Authority said it would allow banks to exclude reserves held at central banks from their calculation of the “leverage ratio,’ a key measurement of bank capital adopted globally after the financial crisis.“The U.K. has recognized that applying their leverage ratio…endangers monetary policy when interest rates are low and accommodative policy has reached its limits,” said Karen Shaw Petrou, managing partner of the policy analysis firm Federal Financial Analytics Inc., in an e-mail. “This is not a unique U.K. concern.” Ms. Petrou’s firm has authored research arguing the leverage ratio could create new risks. While technical, the ratio lies at the heart of one of the most intensive debates between bankers and regulators.The ratio measures equity capital as a percentage of a bank’s total assets. Proponents say it is the best measure of bank capital because of its simplicity: Unlike other capital rules, it doesn’t rely on complex calculations about which assets might pose a future risk.