By Phoebe Seers
LONDON (Reuters) -Bank of England Deputy Governor Sam Woods on Wednesday rejected calls from the banking industry to further relax rules on bank leverage, despite growing pressure from the government to reduce regulatory burdens to boost the UK’s economic growth.
The British government is seeking to soften some finance industry regulations to boost the country’s sluggish growth and compete more effectively with the U.S., where supervisors are taking steps to ease banks’ capital rules.
Woods, speaking before UK ministers and industry leaders at an annual regulatory gathering in London’s financial centre, said some measures being suggested could allow a sharp increase in bank leverage and weaken safeguards designed to prevent excessive risk-taking.
“Taking higher-rated government bonds out of the leverage framework carries real risk,” Woods said, adding that it would risk forgetting lessons from the collapse of Silicon Valley Bank in 2023, when its large holding of long-term government bonds made it vulnerable as they lost value when interest rates rose.
UNDER PRESSURE TO BOOST COMPETITIVENESS
The UK’s Prudential Regulation Authority, which oversees banks and which Woods heads as CEO, has proposed raising the threshold at which the leverage ratio applies.
Woods said core protections for the banking system would not be sacrificed in the name of competitiveness.
The leverage ratio, introduced after the 2008 financial crisis, sets a minimum level of capital banks must hold relative to their total exposures, regardless of asset risk. It is designed to limit borrowing and ensure banks can absorb losses.
Banking industry group UK Finance has argued that gilts (UK government bonds) should be excluded. It said lenders hold fewer domestic government bonds than European and U.S. peers, partly because the leverage ratio treats gilts as full exposures despite their low-risk profile.
Woods said removing sovereign bonds from the framework would “largely eliminate sovereign risk from the bank capital regime” and warned that, unless offset by other capital requirements, it could expose banks to interest rate shocks if large bond holdings were sold off in stressed conditions.
The Bank of England has committed to a review of capital requirements in December.
ILL-PREPARED FOR SHOCKS, FCA SAYS
Nikhil Rathi, the CEO of the Financial Conduct Authority, also speaking at the event, said that the UK was ill-prepared for challenges such as cyber attacks or production shocks that can hit balance sheets, funding, markets and consumers.
Rathi floated the idea of a “national resilience fund” that could invest in dual-use technologies and critical systems.
“Britain will not remain secure nor competitive if we treat finance as separate from our security – and if investors treat defence as separate from growth,” he said.
(Reporting by Phoebe Seers; Editing by Tommy Reggiori Wilkes and Jane Merriman)
