Stay informed with free updates
Simply sign up to the Financial & markets regulation myFT Digest — delivered directly to your inbox.
The UK’s top banking supervisor has warned that it would be “highly risky” to ditch the capital requirements on lenders’ holdings of government bonds, rebuffing recent industry calls for such a move in Britain and the US.
Sam Woods, chief executive of the Bank of England’s Prudential Regulation Authority, said giving UK banks and building societies capital relief on their £150bn of gilt holdings, as well as their multibillion-pound portfolio of foreign government debt, would “risk forgetting one of the main lessons from the 2023 banking failures”.
“Such a change would be equivalent to ripping off our jacket, warm hat and gloves and throwing them all over the nearest cliff,” Woods told the annual Mansion House regulators’ dinner in London on Wednesday, adding that it would be “profound — and highly risky”.
Banking lobbyists in the US and UK have this year called for watchdogs to exempt sovereign debt from lenders’ leverage ratio calculation, which assesses how much capital they need as a percentage of their total assets.
The change would liberate about £5bn of equity capital that UK banks have allocated against their gilt portfolios, based on the UK’s minimum leverage ratio of 3.25 per cent.
Woods, a BoE deputy governor who is due to step down next year, said the collapse of three mid-sized US banks over two years ago — including Silicon Valley Bank — showed “bonds issued by sound governments, if liquidated in size, can pose serious risks to banks’ balance sheets due to interest rate risk”.
SVB collapsed in 2023, dragging its UK subsidiary down with it, after being hit by losses on its large portfolio of US government bonds. They fell in value owing to a sharp rise in interest rates, triggering a run by depositors.
Lifting capital requirements from government debt would “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 lenders decide to sell the bonds, he added.
UK Finance, the main lobbying group for British banks, said in its “plan for growth” proposals for regulatory reforms that it wanted gilts to be exempted from lenders’ leverage ratio calculations.
In June, the US Federal Reserve announced plans to slash the leverage ratio it imposes on the country’s biggest banks from at least 5 per cent of their total assets to 3.5-4.25 per cent — bringing it closer to international standards.
The Fed did not include the exemption of government debt from the leverage ratio in its proposal. But the central bank invited feedback on whether it could be done as an “additional modification”.
US bank lobbyists had pushed for the change, arguing it would increase liquidity in US Treasury markets by boosting broker-dealers’ ability to act as intermediaries.
Speaking at the same event, Nikhil Rathi, chief executive of the Financial Conduct Authority, warned about the need to close “protection gaps” in Britain’s defences against cyber attacks, hacking and other threats to national security.
Pointing to the £1.9bn cost of the cyber attack on carmaker Jaguar Land Rover this year as an example of the vulnerabilities of UK business, Rathi said: “We treat finance as though it sits beside defence, not inside it — and we hesitate to invest in resilience on the sustained scale needed.”
“Globally, a fraction of catastrophe and cyber risks are insured,” he said. “The rest migrate to company P&Ls [profit and loss statements], credit ratings, risk premia, prices and, ultimately, to households.
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.”