UK Prudential Regulation Authority and Financial Policy Committee Proceed with Changes to UK Leverage Ratio for Treatment of Claims on Central Banks

Following positive feedback to a combined consultation issued in June 2017, the Bank of England's Financial Policy Committee and the Prudential Regulation Authority are proceeding with proposed changes to the UK leverage ratio framework. The aim of the proposals (summarized below) was to ensure that the leverage ratio framework does not act as a barrier to the effective implementation of any monetary policy action that leads to an increase in central bank reserves.

In the June 2017 consultation, the FPC consulted on a draft Recommendation to the PRA that the PRA amend its rules on the leverage ratio to: (i) allow firms to exclude from the calculation of the total exposure measure (which serves as the denominator for the leverage ratio) those assets constituting claims on central banks, where they are matched by deposits accepted by the firm that are denominated in the same currency and of identical or longer maturity; and (ii) require a minimum leverage ratio of 3.25%. Central bank claims include reserves held by a firm at a central bank, banknotes and coins constituting legal currency in the jurisdiction of the central bank, and assets representing debt claims on the central bank with a maturity of no longer than three months.

The PRA sought feedback, in the same consultation, on its draft proposals for implementing the Recommendation if adopted by the FPC.

The FPC adopted the Recommendation at its meeting on September 20, 2017. In response, the PRA has amended the PRA Rulebook, related Supervisory Statement and reporting template to:

· align them with an earlier (July 2016) modification by consent to exclude central bank claims matched by deposits in the same currency and of identical or longer maturity from the definition of the total leverage exposure measure in the UK leverage ratio framework;

· increase the minimum leverage ratio requirement from 3% to 3.25% of total exposures; and

· align the UK leverage ratio reporting and disclosure requirements to the proposed definition of the total exposure measure and 3.25% minimum leverage ratio requirement.

The changes will affect PRA-regulated banks and building societies with retail deposits equal to or greater than £50 billion on a solo or consolidated basis and will apply to those firms' reporting and disclosure requirements for end-December 2017 onwards. The FPC has additionally updated its own policy statement on its powers over leverage ratio tools, to reflect the changes.

View the FPC/PRA Policy Statement (PS21/17).

View the original consultation (CP11/17).

View the record of the FPC meeting adopting the Recommendation.

View the updated policy statement on FPC powers over leverage ratio tools.