Bank of England's Rule Review Could Boost Gilt Market but Raise Risks

The Bank of England (BoE) is considering changes to its leverage rules that could boost Britain's government bond market and reduce public borrowing costs significantly. However, former regulators warn that exempting gilts from leverage rules could increase financial risks and undermine bank resilience.

The Bank of England might induce a surge in the British government bond market this week, effectively reducing public borrowing costs by over £1 billion annually, according to banking sources. While this might financially benefit, some former regulators caution that altering the rules could also escalate financial risks.

The BoE is reassessing its leverage rules, which banks argue disincentivize them from holding public debt. This follows the relaxation of U.S. leverage requirements, affecting competitive pressures for British banks. An update will be released in the BoE's Financial Stability Report.

Barclays has suggested that removing banks' holdings of gilts from the leverage ratio would encourage banks to hold more gilts and save the government billions in debt interest. However, former regulators warn that this exemption could weaken bank resilience, akin to removing batteries from a fire alarm.