I beg to move, That the clause be read a Second time.
It is a delight to see the Leader of the House on the Front Bench to debate with me the question of the leverage ratio—I favour the pronunciation, “leaverage”—and I am happy to give way to him if he has any concerns about it. As the Leader of the House—[Interruption]—and, indeed, the Minister will know, a bank’s leverage is the ratio of its assets to equity capital. Its equity capital is equal to the value of its assets, minus the value of its liabilities. Higher leverage rates magnify returns, because any growth in assets will be proportionately greater if equity is thin, but—and this is why it matters—the corollary is that any losses are magnified if leverage is greater. Its equity can be wiped out by a smaller shock than would wipe out the equity of a less leveraged institution.
The Government said that they intended to provide the Financial Policy Committee of the Bank of England with a time-varying leverage ratio tool, but not before 2018, and that that would be subject to a review in 2017 to assess progress internationally. The design of the tool would depend, hon. Members will be glad to hear, on European Union legislation, and will be set out in Britain in due course in secondary legislation. I know that they are keen on that particular process.
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The Independent Commission on Banking was clear on this matter, and said that it supported the use of leveraged ratios as a back-stop. It called for a tapering of the requirements when a bank crossed a certain size
threshold by increasing the minimum leverage ratio from 3%—the Basel proposal—to over 4% on a sliding scale, as the risk weighting of assets to GDP ratio increased from 1% to 3%. The Opposition believe, as do many commentators—this is a question that came up in the recommendations from the Parliamentary Commission on Banking Standards—that reforms are needed to leverage, as well as the risk weighting of assets. In the aftermath of the global financial crisis, regulators introduced the risk weighting of assets process as an antidote to the high-risk, high-reward culture pervasive in banks. That process, however, has been partial, somewhat self-defined by the banks themselves in some cases, and in the European Union, the zero risk weighting attributed to some palpably risky sovereign debts has brought that system into disrepute.
Leverage ratio powers need to be taken in the Bill, and phased in before the EU plans for the end of the decade. That was one of the main conclusions of the Vickers report. Not legislating for leverage restraint is a significant omission from a Bill that the Chancellor claimed would reset the banking system.