The Bank of England (BoE) has published a Consultation Paper from the Financial Policy Committee (FPC) on its review of the role of the leverage ratio in the capital framework for UK firms. Key issues considered in the consultation include the following:
- whether certain features in the existing risk-weighted framework should be mirrored in the leverage framework. The FPC is considering whether there is a case to introduce a leverage conservation buffer on top of the minimum leverage ratio;
- whether a supplementary leverage ratio should be introduced. This supplementary ratio would apply to a subset of firms, such as ring-fenced banks or systemically important institutions or both, whose failure would be most destabilising for the financial system;
- whether there should be a time-varying leverage component, which would be varied in a countercyclical manner as system-wide risks evolve over the cycle;
- potential alternatives to the leverage ratio, such as risk-weight floors and firm-specific capital add-ons; and
- the allocation of responsibilities over the leverage ratio framework. The FPC is minded to recommend that it should be granted powers of direction over all elements of the framework that are not harmonised under EU legislation.
The deadline for responding to the Consultation Paper is 14 August 2014. The FPC intends to publish its final review of the leverage ratio in November 2014.