tl;dr
The Bank of England's top regulator, Sam Woods, has slammed calls to ease capital rules for UK banks holding government debt, comparing it to 'ripping off our jacket, warm hat, and gloves and throwing them over a cliff.' His warning comes amid debates over banking sector resilience and lessons from ...
**Bank of England Official Warns Against Lifting Capital Rules on Government Debt Holdings**
Sam Woods, chief executive of the Bank of England’s Prudential Regulation Authority (PRA), has issued a strong warning against removing capital requirements for UK banks’ holdings of government debt, calling such a move “highly risky” and likening it to “ripping off our jacket, warm hat and gloves and throwing them all over the nearest cliff.” His remarks, delivered at the annual Mansion House regulators’ dinner in London, underscored the dangers of relaxing safeguards in light of recent banking sector pressures and historical failures.
Woods emphasized that easing capital rules on the UK’s £150 billion gilt holdings and multibillion-pound foreign government bond portfolios would “risk forgetting one of the main lessons from the 2023 banking failures.” He referenced the collapse of three mid-sized U.S. banks, including Silicon Valley Bank (SVB), which saw significant losses on its U.S. government bond holdings after sharp interest rate hikes triggered a depositor run. “Bonds issued by sound governments, if liquidated in size, can carry major consequences to banks’ balance sheets due to interest rate risk,” Woods stated.
The banking sector has pushed for regulatory relief, arguing that excluding sovereign debt from leverage ratio calculations would free up £5 billion in equity capital for UK banks. The leverage ratio, which mandates a minimum of 3.25% capital relative to assets, is a key tool for ensuring banks can absorb losses. However, Woods warned that such a move would “allow a very large increase in bank leverage” and “largely remove sovereign risk from the bank capital framework” unless bonds are actively sold.
The debate extends beyond the UK. In the U.S., the Federal Reserve proposed in June to lower the leverage ratio for major banks from 5% to 3.5%–4.25%, aligning with international standards. While the Fed did not include a government debt exemption in its proposal, it sought feedback on the idea as a potential “additional modification.” Meanwhile, UK Finance, the banking sector’s lobbying group, has advocated for excluding gilts from leverage ratios as part of its “plan for growth” reforms.
Woods’ comments highlight the tension between regulatory caution and industry demands for flexibility. The 2023 failures, he argued, demonstrated how even “sound” government bonds can destabilize banks if sold quickly amid rising rates. “Relaxing these rules would undermine the resilience built into the system,” he cautioned.
Separately, Nikhil Rathi, CEO of the Financial Conduct Authority (FCA), urged the financial sector to bolster cybersecurity and risk resilience at the same event. Citing the £1.9 billion cyberattack on Jaguar Land Rover this year, Rathi stressed the need for greater investment in long-term security measures. “Too often, finance has been seen as independent of national security,” he said, noting that uninsured cyber and catastrophe risks leave households and businesses bearing the brunt.
As regulators navigate these challenges, the focus remains on balancing innovation and stability. While banks seek relief to boost lending and growth, supervisors warn that eroding capital safeguards could expose the financial system to renewed vulnerabilities. The lessons of 2023, Woods argued, remain a stark reminder of the risks of complacency.