PRA to raise banking leverage ratio to give smaller lenders 'more space to grow'

The Prudential Regulation Authority (PRA) is consulting on changing the retail deposits leverage ratio threshold to £70 billion – an increase of £20 billion.

The leverage ratio is designed to give a simple percentage indicator of how much capital a firm has to fund its activities. The PRA currently requires firms with over £50 billion in retail deposits or £10 billion of non-UK assets to meet a minimum leverage ratio requirement of 3.25% plus buffers. These thresholds took effect in 2016 and 2023 respectively, and are designed to capture major UK banks, building societies and investment firms.

The PRA is now proposing to raise the retail deposits threshold, increasing it to £70 billion to reflect nominal GDP growth since 2016. The PRA says this increase would "ensure that the threshold continued to capture major UK firms, whilst smaller firms below the new threshold would have more space to grow before becoming subject to the leverage ratio requirement".

The PRA is not proposing changes to the £10 billion non-UK asset threshold, which was implemented much more recently than the retail deposits threshold.

Sam Woods, deputy governor for prudential regulation and CEO of the PRA, said: “Guarding against excessive leverage in our banking system is essential for economic stability, but we should achieve that in a proportionate way. Today’s proposals will support growth and innovation by giving smaller banks more space to grow before entering the leverage regime.”