EU banking watchdog backs keeping broad capital measure unchanged

By Huw Jones

LONDON (Reuters) – The European Union’s banking watchdog has backed maintaining a broad capital adequacy measure known as the leverage ratio unchanged at the current level for most lenders, saying it keeps them stable and does not harm the flow of credit to the economy.

The ratio is a measure of capital to a bank’s assets on a non-risk weighted basis, and is meant to be a backstop to a lender’s core capital ratio, which takes risk into account.

The European Banking Authority said on Wednesday that a leverage ratio of 3 percent was generally consistent with the objective of a backstop measure.

“The potential impact of introducing a leverage ratio requirement of 3 percent on the provision of financing by credit institutions would be relatively moderate,” it said in a 265-page report.

The 3 percent minimum level was temporarily set in the aftermath of the 2007-09 financial crisis by the Basel Committee of banking supervisors from the world’s main financial centers.

Critics say it should be set at a far higher level to rein in bank balance sheets, but the EBA’s stance is a further sign of how regulators have become less hawkish as policymakers put more emphasis on economic growth.

In January this year in a non legally binding decision, Basel’s oversight body also recommended that a ratio of 3 percent was sufficient for the vast majority of lenders, though a higher level was needed for the world’s 30 biggest banks.

Basel is looking to decide by year end how much higher the ratio should be for top lenders, and the EBA said a higher ratio may be warranted.

The European Union will take into account the EBA’s view as it puts the leverage ratio requirement into law, although many lenders already have a ratio of 4 percent or above to reassure investors they are financially sound.

The EBA also recommended that clearing and settlement houses for securities be exempt from having a leverage ratio, but found no reason to exempt the smallest banks.

Banks have said the leverage ratio was making it more costly for them to provide trading services at all times for investors.

But the bloc’s European Systemic Risk Board, made up of central bankers from EU states, said in an annex to the EBA report that no firm conclusion could be reached on this assertion.

(Reporting by Huw Jones; Editing by Ruth Pitchford)