By Huw Jones
LONDON (Reuters) - Britain's banks could have to use a stricter method than global peers for calculating a key measure of capital from next year to make gaming the rules harder, the Bank of England said on Friday.
The BoE's Prudential (LONDON:PRU) Regulation Authority (PRA) published a consultation paper setting out how lenders should compile and publish leverage ratios, a measure of capital to balance sheets on a non risk-weighted basis.
The benchmark is separate from a bank's core ratio, which measures capital to risk-weighted assets.
Under European Union rules brought in after the 2007-09 financial crisis revealed inadequate capital at banks, lenders must publish their leverage ratio at the end of each quarter.
The PRA's proposed method seeks to supplement this with a more stringent approach based on daily-averages throughout the quarter, moving in line with the United States.
"The PRA is of the view that reporting and disclosing a point-in-time leverage ratio alone could create incentives for firms to manage down temporarily around the reporting date, their exposure measure so as to flatter their leverage ratio, a practise commonly referred to as ‘window dressing'," the regulator said.
"Requiring an averaged figure for a firm's leverage ratio across the reporting period should largely eliminate incentives to adjust this ratio on any specific date, as any increase achieved is likely to have little impact on the averaged figure," the PRA said.
It is the latest sign of how more hawkish regulators such as the PRA are making it harder for banks to skirt rules.
Policymakers have said that lower book values of banks in Europe compared with their U.S. rivals are partly due to investors not fully believing the capital ratios they report.
The BoE has mulled requiring larger banks to calculate core capital ratios using a "standard" formula used by smaller banks as well as using in-house models, whose consistency has been questioned.
Britain, Switzerland and the United States have put more emphasis on a bank's leverage ratio, which was originally meant to be a simple "backstop" to core buffers.
All three countries are forcing their banks to have higher leverage ratios than what has been globally agreed so far by the Basel Committee of supervisors from across the world.
Basel allows for more stringent ways to compile a leverage ratio as long as this is done consistently.
The UK change would be phased in over a year from January and the PRA said the cost to banks would not be material.
