22  This change was intended to  ensure the leverage ratio did not impede the transmission of monetary policy. But to offset the removal of central bank reserves and ensure the amount of capital banks need to meet the leverage ratio requirement did not decrease, the requirement was also raised from 3% to 3.25%. A second change was designed to deal with window dressing behaviour that we had started to observe. From 2016 banks have been required to report and disclose the denominator of the leverage ratio based on assets averaged over the quarter. 23,24  Previously it was based on assets observed on the last day of the  quarter. But this led to banks seeking to shrink their balance sheets at quarter-ends in an attempt to  22  Prudential Regulation Authority Statement on the leverage ratio, https://www.bankofengland.co.uk/-/media/boe/files/prudentialregulation/publication/pra-statement-on-the-leverage-ratio-august2016.pdf?la=en&hash=F50C86C8AAA788EBFAC159F009BBED7D2FE07B83, August 2016. 23 Prudential Regulation Authority Policy Statement 27/15, https://www.bankofengland.co.uk/-/media/boe/files/prudentialregulation/policy-statement/2015/ps2715. 24 Banks in scope of the UK leverage ratio framework are required to disclosure a leverage ratio each quarter. A bank’s leverage ratio denominator should be based on its daily on-balance sheet exposures averaged over the quarter and its monthly (on the last day of the month) off-balance sheet exposures averaged over the quarter. 10  All speeches are available online at www.bankofengland.co.uk/speeches  10  increase the leverage ratios they disclosed. This led in turn to volatility in some financial markets at these times (Chart 6). Volatility at quarter-ends appears to have abated since this change.

Long live the revolution!’, a speech by Sam Woods, https://www.bankofengland.co.uk/-/media/boe/files/speech/2016/the-revolution-is-over-long-live-therevolution.pdf?la=en&hash=C5A74C42F5129D9505A8FA27B211BE2404C71351, and ‘Rethinking financial stability’, a speech by Andy Haldane, https://www.bankofengland.co.uk/-/media/boe/files/speech/2017/rethinking-financialstability.pdf?la=en&hash=C6F5991F2DD69E1C84610B0EBE51FB03F5F62E61 3  3  All speeches are available online at www.bankofengland.co.uk/speeches  3  they were prior to the crisis (Chart 1). And UK banks’ buffers of liquid assets have increased by over 40 percent since 2010 (Chart 2). Basel III finalisation Turning back to last December’s Basel III package, it is important to remember the aim of these reforms. Their aim was to reduce excessive variability of banks’ risk-weighted assets, and in doing so making banks’ risk-based capital ratios more transparent and comparable. 8  This excessive variability is caused by the fact banks’ internal models can generate widely different risk weights for very similar assets. When the Basel Committee asked banks to calculate risk weights using their internal models for hypothetical portfolios of assets banks reported very different risk weights. The ratio of highest to lowest risk weights was as high as 2.3 for a hypothetical portfolio of trading book exposures (and 9  even higher for individual asset classes in the banking book). To put that in context, against the same portfolio of exposures, one bank might be holding £ of capital whereas another one might be holding £  This risk weight variability could reduce the stability of the banking system by impairing the link between risk and capital at the level of the system. It means banks with similar portfolios will not be equally resilient.