Here’s a policy tweak that sounds boring but could move billions: banks are pushing the Bank of England to stop counting UK government bonds against their leverage ratios. If that sentence made your eyes glaze over, the translation is simple. Banks want permission to buy more government debt without it making them look riskier on paper.
The pitch, laid out in a Barclays report, argues that excluding unencumbered UK gilts from leverage exposure calculations would generate roughly £150 billion in additional demand for British government bonds. That kind of buying pressure could push gilt yields down by up to 20 basis points, saving the UK government an estimated £2.5 billion per year in debt-servicing costs.
What the leverage ratio actually does
The leverage ratio is one of those post-2008 financial crisis inventions designed to keep banks from getting too clever with risk models. Unlike risk-weighted capital requirements, which let banks assign different risk levels to different assets, the leverage ratio is blunt by design. It’s a simple calculation: capital divided by total exposures, no exceptions.
That “no exceptions” part is exactly what banks want to change. Under current rules, even the safest assets, including UK government bonds, count toward a bank’s total exposure. Which means every gilt a bank buys eats into its leverage capacity, limiting how much other business it can do.
The BoE isn’t exactly rushing to agree
BoE Deputy Governor Sam Woods has previously dismissed the idea of exempting sovereign bonds from leverage calculations. His characterization was notably blunt: he called such proposals substantial and highly precarious from a financial stability perspective.
The concern isn’t hypothetical. The entire point of the leverage ratio is to serve as a backstop, a safety net that catches risks the more sophisticated models might miss. Start carving out exemptions, even for seemingly safe assets, and you undermine the whole purpose of the framework.
There’s also a historical lesson lurking here. European banks loaded up on sovereign debt before the eurozone crisis, partly because capital rules treated government bonds as risk-free. When those bonds turned out to be very much not risk-free, the damage was severe. The leverage ratio was specifically designed to prevent that kind of concentrated exposure from flying under the regulatory radar.
That said, the Prudential Regulation Authority has shown some willingness to evolve the framework around the edges. In November 2025, the PRA raised the retail deposits threshold for the leverage ratio from £50 billion to £75 billion. It also introduced a three-year averaging mechanism to smooth out fluctuations.
The £2.5 billion annual savings figure is doing a lot of heavy lifting in Barclays’ argument. In a world where the UK government is under pressure to fund everything from defense spending to infrastructure, that number is hard to ignore politically. The question is whether political pressure eventually overrides regulatory caution, or whether the BoE holds firm on the principle that leverage ratios should remain simple and comprehensive.
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