Bank of England's Leverage Rules Review: Potential Impact on UK Government Bond Market and Public Borrowing Costs
The Bank of England is considering changes to its leverage rules that could potentially boost the UK government bond market and reduce public borrowing costs by over £1 billion a year, according to banks. The review of leverage rules follows a relaxation of U.S. leverage requirements and could lead to British banks holding more gilts, resulting in lower average yields and savings for the government. Barclays and Lloyds are among the banks advocating for changes to the rules to encourage banks to hold more gilts, which could have significant financial benefits for the government.
Barclays has proposed that banks' holdings of gilts should not be counted towards the leverage ratio, which requires banks to have capital to cover potential losses. This change could lead to increased demand for gilts and substantial savings for the government in debt interest payments. Other banks, such as Lloyds, also see potential benefits from a change in the rules, albeit on a smaller scale. The Treasury is keen on supporting gilt issuance, and a regulatory change that boosts bank gilt demand is seen as politically appealing.
The BoE has not yet indicated its support for exempting gilts from leverage rules, with some former regulators expressing concerns about the potential risks of such a change. While the review is ongoing, there are discussions about recalibrating risk weights and addressing issues related to lending to non-bank financial companies. The BoE may consider scrapping a cyclical component of the leverage ratio unique to UK regulation as an alternative approach.
In addition to the review of leverage rules, the BoE is also examining risks posed by private markets and the gilt repo market. The central bank is conducting stress tests on the resilience of the private markets to geopolitical shocks and is considering measures to address risks in the gilt repo market. Deputy Governor Sarah Breeden has emphasized the importance of taking action to mitigate risks in these markets. Overall, the BoE's focus on regulatory changes and market risks reflects its commitment to maintaining financial stability and resilience in the UK economy.