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A parliamentary revolt against the Treasury could force UK banks to meet tougher leverage ratios than their global rivals.

According to the influential Parliamentary Commission on Banking Standards, elements of the government’s proposed new banking legislation are “extremely weak” and must be urgently toughened.

A commission report to be published on Monday to coincide with the second reading of the banking reform bill in the House of Commons, points to nine areas where the proposed law falls short of the commission’s earlier recommendations.

Rejecting a fierce lobbying campaign by the City, the commission highlights a particular concern with the bill’s position on “leverage” – a crucial measure restricting a bank’s size relative to its equity capital – which it says is “ almost certainly too low”.

The proposed law states that a bank’s equity capital must exceed 3 per cent of its assets – in line with incoming global rules contained in the so-called Basel III rulebook. The original Vickers review recommended a leverage ratio of at least 4 per cent.

“The historic and prospective ineffectiveness of risk-weighting makes leverage ratios at the appropriate level all the more important as a backstop,” today’s report from the commission says, adding that it is “wholly unconvinced” by the government’s insistence on a 3 per cent ratio.

The parliamentary banking commission – chaired by Conservative MP Andrew Tyrie – was set up last year to look at ethics in banking in the wake of the Libor rate-rigging scandal. Other members include former chancellor Lord Lawson; Justin Welby, the new Archbishop of Canterbury; and former Treasury select committee chairman Lord McFall.

But George Osborne later gave it the additional power to scrutinise the legislation being used to implement the Vickers review and its central recommenation that high-street banks be “ringfenced” from riskier investment banking operations.

In a signal of its determination to push Mr Osborne further, Mr Tyrie’s commission has published draft amendments to toughen the bill which are expected to become the focus of a parliamentary revolt when the bill reaches the Lords.

“The government rejected a number of important recommendations. The Commission has examined these again, alongside the Government’s explanations for rejecting them,” Mr Tyrie said. “We have concluded that the Government’s arguments are insubstantial. There remains much more work to be done to improve the Bill.”

Ed Balls, Labour’s shadow chancellor, welcomed the commission’s amendments. He added that its report confirmed that Mr Osborne was “continuing to duck the radical banking reform we need”.

“In particular we need a strong reserve power with the option for full separation of banks across the board, and not just for one or two banks,” Mr Balls said.

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