Pulling the levers of finance

This is the exchange of letters between the two most powerful people in the British economy, in which they have agreed to press ahead with an investigation into whether the Bank of England needs to have the power to set a leverage ratio for UK financial services firms. First, the Chancellor, George Osborne, wrote to the Governor of the Bank of England, Mark Carney—letter here. Carney’s reply can be read here.

Well, leverage, shmeverage—why should this be of any interest at all? Because a formal leverage ratio would set limits for how much a bank could borrow in relation to how much capital it holds. The crash of 2008 came about in part because banks borrowed far too much in relation to their capital and when it came time to pay back their borrowing, it turned out they did not have the cash to do so—in short, they were too leveraged, or if you prefer, they were over-levered.

It seems that Osborne and Carney are set on writing rules to make sure that Britain's banks can never again get themselves into a similar state, where their borrowing has got so out of kilter with their holdings of capital. But as it clear, especially form Carney's letter, the road to this regulatory panacea runs through Europe—in this case, Basel—and as such will feature some fiendishly complex twists and turns.