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British banking commission urges stringent capital ratios

The parliamentary commission on banking standards said that elements of the proposed new banking law are overly weak.

The British parliamentary commission on banking standards, chaired by Conservative MP Andrew Tyrie, has expressed concern that the government’s proposed new banking legislation doesn't require a stronger leverage ratio, an important measure that limits a bank’s size relative to its equity capital.

In its report, to be published today, the commission said that elements of the proposed new banking law are very weak and should be made more stringent.  

The commission further said that the proposed law falls short of its earlier recommendations.

As per the proposed law, a bank’s equity capital must exceed 3 per cent of its assets in line with new global rules of the Basel III rulebook. The earlier Vickers review recommended a leverage ratio of at least 4 per cent.

In its report, the commission said that: “The historic and prospective ineffectiveness of risk-weighting makes leverage ratios at the appropriate level all the more important as a backstop and adds that it is wholly unconvinced by the government’s insistence on a 3 per cent ratio.”

George Osborne gave more power to commission to examine the law being used to implement the Vickers review and its central recommenation that high-street banks be ringfenced from riskier investment banking operations, according to the Financial Times.

Tyrie said: “The government rejected a number of important recommendations. The commission has examined these again, alongside the government’s explanations for rejecting them. We have concluded that the government’s arguments are insubstantial. There remains much more work to be done to improve the bill.”

Ed Balls, Labour’s shadow chancellor, welcomed the commission’s amendments. “In particular we need a strong reserve power with the option for full separation of banks across the board, and not just for one or two banks,” Balls said.

The commission was set up in 2012 to examine principles in banking in the wake of the London inter-bank lending rate (Libor) scandal.