Requiring large UK banks to report leverage ratio daily will avoid ‘window dressing’

RobAllen 141Requiring large UK banks to report leverage ratio daily will avoid ‘window dressing’ by Rob Allen

Requiring the largest UK banks to report capital held as a percentage of on-balance sheet assets daily will prevent the financial stability measure being used as mere “window dressing”, the Prudential Regulation Authority (PRA) has said.

The term ‘window dressing’ is used by regulators to refer to the practice of banks “managing down” the value of their balance sheets around the reporting date, with the effect that their published leverage ratio figures are more flattering than they otherwise would be, the PRA said in a consultation paper outlining its proposed approach to leverage ratio reporting. For this reason, UK banks will be required to report an averaged figure, it said.

“As a non-risk sensitive measure, the leverage ratio is designed in such a way that it generally assigns equal weights to firms’ exposures and therefore is prone to the risk of period-end balance sheet management that improves firms’ leverage ratio positions temporarily,” the regulator, which is part of the Bank of England, said in its consultation paper.