Key facts
- Banks propose the Bank of England exclude British government bonds (gilts) from leverage ratio calculations.
- This change could increase bank holdings of gilts by up to £150 billion.
- Banks estimate this could save the government £1 billion to £2.5 billion annually in debt interest.
- Former regulators warn that such a change would increase financial risks.
- The Bank of England is expected to provide an update on its leverage rule review on Tuesday.
Banks are urging the Bank of England to consider exempting British government bonds, known as gilts, from leverage ratio requirements. This move, they argue, could significantly boost demand for gilts, lower public borrowing costs by over £1 billion annually, and save the government billions in debt interest. Barclays suggested that excluding 'unencumbered' gilts could encourage banks to hold up to £150 billion more, potentially lowering average yields by a fifth of a percentage point and saving the government £2.5 billion a year. Lloyds also anticipates substantial interest payment reductions.
However, former regulators have voiced strong concerns about the potential financial risks associated with such a change. Sam Woods, former deputy governor for prudential regulation, described exempting all gilts as a "profound — and highly risky — change." David Aikman, who helped develop the original rules, suggested that the leverage ratio should not be circumvented and that the focus should be on recalibrating risk weights rather than removing safeguards.
The Bank of England is expected to provide an update on its review of leverage rules and other buffers in its Financial Stability Report on Tuesday. The central bank is also scrutinizing risks associated with private credit markets and the gilt repo market, where similar concerns about concentrated risk have been raised.