UK banks are accusing the Bank of England of not addressing the competitive disadvantage they face against Wall Street firms due to stricter capital rules. Specifically, they point to leverage ratios that are reportedly more stringent in the UK, impacting their ability to compete, particularly in capital markets. This disparity means UK banks have higher capital requirements relative to their assets compared to their US counterparts, affecting their capacity to lend and engage in certain financial activities.
One significant area of contention is the treatment of UK government bonds (gilts) within the leverage ratio calculation. UK banks argue that including gilts in this calculation unfairly inflates their leverage requirements, discouraging them from holding these sovereign assets. This contrasts with practices in the US, where similar sovereign debt may be treated differently by regulators, potentially giving US banks an edge in managing their balance sheets and risk exposures. Barclays, for instance, has advocated for excluding "unencumbered" gilts from these calculations, suggesting this could encourage an additional $150 billion in gilt holdings and save the government $2.5 billion annually in debt interest.
The Bank of England has been reviewing its leverage rules, acknowledging that the leverage ratio has become a binding constraint for three out of seven major UK banks, making their requirements higher than international peers. While the Bank has proposed easing some rules, such as removing the Countercyclical Leverage Buffer and liberalizing capital release rules, it has not publicly supported a full exemption for gilts. Former regulators have expressed concerns that such an exemption would be a "profound—and highly risky—change," potentially increasing financial risks and intertwining the health of banks and government finances too closely.
The ongoing review also follows similar moves by US regulators to relax leverage requirements, intensifying competitive pressures on British lenders. The potential changes aim to give banks greater capacity to lend and return capital, especially during periods of market stress, but some policymakers warn that looser rules could increase market-based leverage and resilience risks. The proposed changes are subject to consultation, with details like scope, thresholds, and timing yet to be finalized. The City of London has urged the Bank of England to delay implementation of new capital rules until mid-2025 to allow for a more thorough review and to ensure competitiveness.
