UK regulator rejects easing bank capital rules on sovereign debt

Sam Woods, chief executive of the Bank of England’s Prudential Regulation Authority (PRA), has cautioned that removing capital requirements on lenders’ holdings of government debt would be “highly risky,” rejecting recent calls from the banking sector in Britain and the US.

According to the UK’s top banking supervisor, granting UK banks and building societies relief on their £150 billion gilt holdings, as well as their multibillion-pound foreign government bond portfolios, would “risk forgetting one of the main lessons from the 2023 banking failures.”

Speaking at the annual Mansion House regulators’ dinner in London on Wednesday, Woods said such a move would be “equivalent to ripping off our jacket, warm hat and gloves and throwing them all over the nearest cliff,” describing it as “profound — and highly risky.”

Lessons from 2023 bank failures highlight risks of relaxing leverage ratios

Bank lobbyists in Britain and the United States have called on regulators this year to exclude sovereign debt from leverage ratio calculations, which dictate how much capital banks must hold for each dollar of assets. In the UK, it would release around £5 billion of equity capital currently trapped in gilt portfolios at a minimum leverage ratio of 3.25%.

Woods, a BoE deputy governor who is set to step down in 2026, noted that the failure of three mid-sized US banks over two years ago — including Silicon Valley Bank — indicated “bonds issued by sound governments, if liquidated in size, can carry major consequences to banks’ balance sheets due to interest rate risk”.

SVB’s 2023 collapse, which also affected its UK subsidiary, followed losses on its large US government bond holdings after interest rates rose sharply, sparking a depositor run. Woods added that lifting capital requirements on government debt could “allow a very large increase in bank leverage given the size of banks’ sovereign holdings” and would “largely remove sovereign risk from the bank capital framework” unless banks actively sell the bonds.

UK Finance, the main lobbying group for British banks, has previously proposed exempting gilts from leverage ratio calculations as part of its “plan for growth” regulatory reforms.

Meanwhile, in June, the US Federal Reserve proposed lowering the leverage ratio for the country’s biggest banks from at least 5% to between 3.5% and 4.25%, aligning more closely with international standards. The Fed did not include a government debt exemption in the proposal. Still, it sought feedback on it as a potential “additional modification,” amid lobbying arguments that it could improve liquidity in US Treasury markets.

Financial sector urged to strengthen cybersecurity and risk resilience

Speaking at the Mansion House gathering, Nikhil Rathi, CEO of the Financial Conduct Authority, stated that there is growing recognition in the UK of the need to manage cyber risks. He cited the £1.9 billion cyberattack on Jaguar Land Rover this year as an illustration of the threats faced by UK businesses. He said that too often, finance had been seen as independent of national security, with insufficient investment in long-term resilience.

Rathi also noted that most catastrophe- and cyber-risks in the world remain uninsured, leaving companies, credit ratings, risk premia rates, prices, and ultimately households to bear the burden.

Calling on banks and insurers to “step up”, Rathi added: “Let’s all harness the City’s expertise to address the insurance challenges. We will keep shining a light on both the risks and opportunities.”

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