London, United Kingdom. The Bank of England is reviewing how its leverage rules operate, a move banks say could boost demand for British government bonds and reduce public borrowing costs by more than £1 billion a year. Former regulators have warned that changing the rules would increase financial risks.
Bank of England review due in Financial Stability Report
The Bank of England is due to provide an update on its plans in its half-yearly Financial Stability Report, scheduled for release at 0930 GMT on Tuesday.
The review of leverage rules and other buffers follows a relaxation of US leverage requirements in November. That development increased competitive pressures for British lenders and, according to the article, potentially undermined broader resilience nearly 20 years after the global financial crisis.
Banks argue current rules discourage gilt holdings
Banks argue that the current leverage rules discourage them from holding public debt. Barclays, which has more than 20 million UK customers, has called on the Bank of England to stop counting banks’ holdings of British government bonds, known as gilts, towards the leverage ratio.
That ratio requires banks to hold capital worth somewhat more than 3.25 per cent of their assets to help cover losses.
Barclays said such a change could encourage British banks to hold up to £150 billion more gilts, lower average yields by a fifth of a percentage point and save the government £2.5 billion a year in debt interest at a time of stretched public finances.
The bank said the change should apply only to “unencumbered” gilts, meaning bonds that banks are free to sell and that are not already pledged as collateral in another transaction.
Lloyds sees smaller increase in demand
Lloyds also said a rule change could produce a sizeable, though smaller, effect. It said the measure might lead to a £30 billion increase in gilt demand, while still reducing interest payments for the government by at least £1 billion a year.
Lloyds fixed income analysts Karim Henide and Sam Hill wrote: “Supporting the bid for gilt issuance has become a primary concern for the Treasury. A regulatory change that mechanically raises bank gilt demand is politically attractive.”
Government financing pressures in focus
Britain’s government has become increasingly reliant on foreign investors, including hedge funds, to finance its borrowing, one factor behind higher yields.
The article said British banks hold only half as much domestic bank debt as their euro zone peers.
