PRA Archives - the patient investor

Margot Patrick at WSJ reports that the Bank of England is enforcing a new “leverage ratio” rule:

Top U.K. banks regulator Andrew Bailey told lawmakers that the requirement for banks to hold at least 3% equity against total assets “is a sensible minimum,” and that those who fall short must act quickly, but without cutting their lending to households and businesses.

The Bank of England’s Prudential Regulation Authority on June 20 said Barclays and mutual lender Nationwide Building Society don’t meet the standard and gave them 10 days to submit plans for achieving it.

I hope that their Australian counterpart APRA are following developments closely. Both UK and Australian banks are particularly vulnerable because of their over-priced housing markets. And while the big four Australian banks’ capital ratios appear comfortably above 10 percent, these rely on risk-weightings of 15% to 20% for residential mortgages.

Only when the tide goes out do you discover who’s been swimming naked. ~ Warren Buffett

Anne-Sylvaine Chassany at FT writes of the UK’s Prudential Regulation Authority:

The PRA irked banks when it included a 3 per cent leverage ratio target in its assessment of UK lenders’ capital health. It identified shortfalls at Barclays and Nationwide, the UK’s largest building society, which have projected leverage ratios of 2.5 per cent and 2 per cent respectively under PRA tests.

Outrageous isn’t it? That banks should be asked to maintain a minimum share capital of three percent against their lending exposure — to protect the British taxpayer from future bailouts. My view is that the bar should be set at 5 percent, although this would have to be phased-in over an extended period to prevent disruption.

I hope that APRA is following developments closely. The big four Australian banks are also likely to be caught a little short.

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Australian banks: Who’s been swimming naked?

Barclays’ threat on lending under fire | FT.com