The leverage ratio was introduced by former Bank of England governor Mervyn King but has come under fire for limiting mortgage lending.
In an exchange of letters between Chancellor George Osborne and current governor Mark Carney the pair agreed a review should look at the issue.
The Chancellor said he wanted to see ‘clear evidence’ that implementing standards above the international level would help achieve financial stability in the UK.
“I think now is the right time for the FPC to assess what is the full set of powers that it needs in order to fulfil its statutory objectives,” wrote Osborne.
“I also wish to understand the impact of the introduction of the leverage ratio on the ability of the banks to support growth in lending to UK consumers and businesses, which is a critical element of the government’s economic strategy.
“Therefore now is an appropriate time for the FPC to consider whether and when it needs any additional powers and how any new powers would fit in with the rest of its macro-prudential ‘tool-kit’.”
Osborne said the Bank should finalise the terms of reference for the review when the current Basel process ends in early 2014 and deliver its findings within a year.
“My view has been that a minimum leverage ratio is a vital component of the overall capital framework,” Carney responded.
“As I said to the Treasury Committee in February, if I were to choose just one reason why Canadian banks fared as well as they did through the crisis, it would be because they were subject to a leverage standard.
“It is, therefore, crucial that we have an appropriately calibrated minimum leverage ratio for UK banks. There is also a compelling logic to being to move that minimum in the light of any variations in the corresponding risk-weighted standards.”
