On 11 July 2014, the Bank of England’s Financial Policy Committee (“FPC”) published a consultation paper on a review of the leverage ratio, an indicator of a firm’s solvency. The FPC was requested by HM Treasury to conduct a review of the leverage ratio, including the FPC’s ‘toolkit’ for implementing the framework.

The FPC is seeking views on policy choices determining the role of the leverage ratio in the capital framework for UK firms, including the design of the framework. The main issues considered are: (i) whether certain characteristics in the existing risk-weighted framework should be echoed in the leverage   framework - the FPC is considering whether a leverage conservation buffer on top of the minimum leverage ratio should be introduced; (ii) whether an additional leverage ratio should be introduced, which would apply to a different category of firm such as ring-fenced banks or systemically important institutions (or both) whose failure would be most destabilising for the financial system; (iii) whether a time-varying leverage component should be introduced; and (iv) possible alternatives to the leverage ratio. The FPC also considers that it should be granted powers of Direction over the entire leverage ratio framework as soon as possible. A Direction from the FPC would require the Prudential Regulation Authority (“PRA”) or Financial Conduct Authority (“FCA”) to implement a specific macroprudential measure. The consultation closes on 14 August 2014. The FPC intends to publish a final review on the leverage ratio by November 2014.

The paper available at:

http://www.bankofengland.co.uk/financialstability/Documents/fpc/fs_cp.pdf.