BBA: leverage rule could backfire The BBA warned that a requirement to hold Tier 1 capital equivalent to at least 3pc of banks' total assets might encourage lenders to pursue more risky activity at the expense of lower-risk, but lower-return, business. Several major economies, including the US, Canada and Switzerland, have imposed higher leverage ratios on their banks. However, the BBA said these comparisons were "misleading" as different countries calculate totals in different ways. If you apply the Basel III rules, Canadian and US requirements to the same sample bank balance sheet, they result in different leverage ratios of 3.08pc, 4.23pc and 5.34pc respectively. This is because banks in the US and EU have contrasting business models and are subject to different accountancy and regulatory regimes," said the BBA in a briefing paper. Barclays and Nationwide have been told by the Bank of England they must raise more capital to meet the incoming leverage ratio rules, with Barclays set to launch a £5.8bn rights issue to bolster its balance sheet. However, the BBA said the new focus on the leverage ratio would not "make banks more competitive or less risky." The BBA said the calls to introduce an even higher leverage ratio requirement of 4pc would particularly hit banks involved in low-risk businesses such as prime mortgage lending. These banks would need to reduce the size of their balance sheet, or increase the amount of capital they hold against these loans, to meet leverage ratio capital requirements. This would have the perverse effect of incentivising banks to fund riskier loans because they generate more potential income," said the BBA. The House of Lords is due to vote on the reforms next month, with several peers expected to call for a higher leverage ratio. Several senior policymakers have also spoken in favour of a higher leverage ratio as a safeguard for the financial system. The UK is pushing banks to meet the Basel III capital rules for banks early, ahead of a 2019 deadline.