Will the BoE Loosen Bank Leverage Rules to Support the Gilt Market?

The Bank of England(BoE) is going to publish its July Financial Stability Report at 10:30 a.m. (GMT+1) on July 7. There is one issue could have consequences well beyond bank regulation: whether British lenders should be given more room to hold government bonds.

The BoE has been reviewing its leverage rules after banks argued that the current framework discourages them from holding gilts. Under the existing regime, banks must hold capital against total exposures, including government bonds, with a leverage requirement of somewhat above 3.25% for affected institutions. Reuters (July 6) - the central bank is expected to update the market on this review in today’s Financial Stability Report. 

The most aggressive proposal would exclude gilts from the leverage calculation. Barclays estimates such a change could allow UK banks to hold as much as £150 billion more in gilts, potentially lowering yields and saving the government around £2.5 billion a year in borrowing costs. 

However, the policy trade-off is extremely obvious.

Supporters argue that relieving the constraint could bring banks back into the gilt market, improve demand for government debt and reduce financing pressure at a time when Britain is increasingly dependent on foreign investors. The US has already relaxed comparable leverage requirements which added competitive pressure on British banks. 

Objectors see a different risk. Former regulators warn that excluding gilts could weaken one of the financial system’s basic safeguards. David Aikman, a former BoE official, told Reuters that the answer was not to “take the batteries out of the fire alarm,” but to investigate whether other risk weights had become too loose.

Therefore, the real question behind today's report is: how far is the BoE prepared to move?

1. A full gilt exemption would be the clearest market-friendly signal.
2. A narrower adjustment (e.g. changing the UK specific cyclical component of the leverage ratio) would suggest the Bank wants to support balance sheet capacity without dismantling the broader safeguard.
3. No meaningful easing would show that financial stability concerns still outweigh the pressure to strengthen gilt demand.

The BoE is also expected to address risks in private credit and the gilt repo market. Previously, it has warned that concentrated: leveraged hedge fund strategies could make government bonds harder to trade during a crisis.

To sum up, the question before the report comes out is: whether the BoE decides that supporting gilt market capacity now justifies accepting more balance sheet risk inside the banking system.

Source:

1. Bank of England could boost bond demand with leverage rule tweak, banks say, July 6, 2026 https://www.reuters.com/business/finance/bank-england-could-boost-bond-demand-with-leverage-rule-tweak-banks-say-2026-07-06/