Forcing banks to recapitalise could backfire - Bankers Association UK

Forcing banks to hold greater amounts of capital under a new "leverage ratio" rule could lead lenders to give up on less risky business, according to the British Bankers' Association (BBA).

The BBA warned that a requirement to hold Tier 1 capital equivalent to at least three per cent of banks' total assets might encourage banks to pursue more risky activity at the expense of lower-risk, but lower-return, business.


Several major economies, including the US, Canada and Switzerland, have imposed higher leverage ratios on their banks. However, the BBA said these comparisons were "misleading" as different countries calculate totals in different ways.


According to the BBA in a briefing paper published in the Telegraph in London "If you apply the Basel III rules, Canadian and US requirements to the same sample bank balance sheet, they result in different leverage ratios of 3.08 per cent, 4.23 per cent and 5.34 per cent respectively. This is because banks in the US and EU have contrasting business models and are subject to different accountancy and regulatory regimes”.


Barclays and Nationwide have been told by the Bank of England they must raise more capital to meet the incoming leverage ratio rules, with Barclays set to launch a £5.8bn rights issue to bolster its balance sheet.


However, the BBA said the new focus on the leverage ratio would not "make banks more competitive or less risky". The BBA said the calls to introduce an even higher leverage ratio requirement of four per cent would particularly hit banks involved in low-risk businesses such as prime mortgage lending.


"These banks would need to reduce the size of their balance sheet, or increase the amount of capital they hold against these loans, to meet leverage ratio capital requirements. This would have the perverse effect of incentivising banks to fund riskier loans because they generate more potential income," said the BBA.

The House of Lords is due to vote on the reforms next month, with several peers expected to call for a higher leverage ratio. Several senior policymakers have also spoken in favour of a higher leverage ratio as a safeguard for the financial system.


The UK is pushing banks to meet the Basel III capital rules for banks early, ahead of a 2019 deadline.


Presently in Ghana, there is a debate over the minimum capital requirement for banks in the country.


Most of the banks, particularly the indegenous ones, are of the view that raising the minimum capital above the GH¢60 million to about GH¢120 million could force them to lose their identity because they may, in their quest to attract investors to help them shore up their capital could lead to a takeover.


The arguements for and against the proposal of the Central Bank in Ghana could be thoroughly subjected to some more debate taking into account what is presently pertaining in other jurisdictions and published by the Telegraph.


Banking is a delicate business which requires strong regulations and strict risk management systems but at the same time, it requires some level of flexibility to allow for smooth operations within the sector.

The irony in Ghana is that the lower the minimum capital requirement, the more banks will spring up in every corner of the country.


There are presently dozens of savings and loans companies in the country, majority of which are positioning themselves for a major unslaught into the banking sector.


This would mean that, they will spread themselves thin and that could be risky, using the example of Nigeria some fews years back as an example.


But at the end of the day, the debate should be open and frank to ensure that whatever is conlcude is in the best interest of the sector and the economy in general.