This seems a sensible outcome, and it is reasonable therefore to test whether the equivalent treatment for collateral swaps, which captures only the CCR add-on in the exposure measure, really captures all the leverage firms are taking on. This is a big business – for example, a recent survey of 14 UK-based broker dealers found a stock of £ trillion in collateral swaps. As a thought experiment, had Basel chosen to capture these exposures for leverage purposes in the same way as it captures repo (so counting the collateral borrowed, in the same way as the cash leg is counted for repo) then, under some worst case assumptions, and bearing in mind that the data can vary from year to year, the aggregate leverage ratio of firms in our sample could fall by 50 basis points (from 5.3% to 4.8% - see Chart 9). Two other parts of the leverage framework should also be in the sights of our horizon-scanning teams as they ask whether we are missing anything important. First, the proportion of repo activity which is netted 6  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  6  – which (based on initial data) grew from 14% to 19% from 2015 to 2017 for firms in our sample. This matters because the netting of cash payables and receivables in repo transactions reduces the exposure measure – this seems perfectly reasonable, but is out of line with the general philosophy of the leverage ratio of not recognising collateral.
Third, on the insurance side we have been putting a lot of effort into making sure that equity-release mortgage holdings are treated appropriately on insurance companies’ regulatory balance sheets. We think it likely that this product will grow in the UK for reasons unrelated to financial regulation, and that it makes sense for annuity-writers to be an important part of the picture. But this has been a classic example of a weak spot in the regulatory regime, which was simply not designed with this product strongly in mind. The result of this has been an excessively wide variation of approaches for these assets at insurance companies, with practices at the more aggressive end of the market presenting a risk in our view to policyholders and to our competition objective. We have therefore shored up this part of our framework and put in place a much more solid basis for this asset class going forward. I know that some building societies have exposures to this asset class as well, and would urge them to proceed with caution given the complexities involved. So even within the important but relatively straightforward asset class of UK residential mortgages there are several juicy topics for our horizon-scanning enthusiasts to get their teeth into. Fortunately, or unfortunately depending on your approach to life, there are further targets available if we move onto other asset classes – asset classes which I very much hope are much more remote to building societies!