The Bank of England’s Prudential Regulation Authority chief executive Sam Woods has cautioned about the perils of lowering capital requirements for banks’ government bond investments.
Addressing attendees at the annual Mansion House regulators’ dinner in London, Woods stressed the importance of maintaining current capital rules, countering recent suggestions from the banking sector in both the UK and the US.
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In his remarks, Woods highlighted the danger of granting UK banks and building societies capital relief on their holdings of government bonds, which include £150bn of gilts and a substantial amount of foreign government debt.
He stated: “Such a change would be equivalent to ripping off our jacket, warm hat and gloves and throwing them all over the nearest cliff.”
The banking industry has been advocating for the exclusion of sovereign debt from the leverage ratio calculation of lenders, which determines the required capital buffer based on total assets.
This adjustment could release about £5bn of equity capital currently set aside against UK banks’ gilt portfolios, given the country’s minimum leverage ratio requirement of 3.25%, the Financial Times report noted.
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By GlobalDataDrawing lessons from the banking sector’s recent turmoil, Woods referred to the collapse of three mid-sized US banks, including Silicon Valley Bank, as a caution.
The bank’s downfall, which also affected its UK subsidiary, was triggered by significant losses on its US government bond holdings due to rising interest rates, leading to a depositor exodus.
Woods warned that eliminating capital requirements for government debt would “allow a very large increase in bank leverage given the size of banks’ sovereign holdings.”
This move would essentially “largely remove sovereign risk from the bank capital framework,” unless banks opt to divest from their bond positions.
Woods is preparing to conclude his tenure as a deputy governor of the Bank of England next year.
In September 2025, the PRA proposed the removal of 37 reporting templates in the initial stage of its ongoing Future Banking Data review.
