Barclays PLC has informed the UK government that removing capital requirements for a significant portion of government bonds held by banks could boost demand for UK gilts by £150 billion and reduce the Treasury's annual borrowing costs by £2.5 billion.
A research report published by the British bank on Thursday provided one of the most detailed estimates to date on how granting capital relief for UK banks' sovereign debt holdings could invigorate the government bond market and create additional fiscal space.
This idea, long promoted by banking lobbyists, may hold greater appeal for Chancellor Rachel Reeves after the UK's 10-year borrowing costs surged above 5% last month, reaching their highest level since the 2008 financial crisis.
However, such a move would make the UK an international outlier and would almost certainly face opposition from Bank of England regulators, who fear it would weaken crucial safeguards against financial crises. Even the deregulation-focused administration of former US President Donald Trump recently decided against implementing a similar policy shift.
The proposal could create an awkward situation for Katharine Braddick. The former Barclays strategic policy head has been appointed to succeed Sam Woods as the UK's top banking regulator when he steps down as CEO of the Prudential Regulation Authority in June.
During questioning by lawmakers about her appointment last week, Braddick distanced herself from her former employer's position, stating: "Barclays' position is Barclays' position."
Barclays' policy development team—an internal think tank—examined the potential impact of exempting certain UK gilts from bank leverage ratio calculations. The leverage ratio assesses the capital banks must hold against their total assets.
The team did not recommend exempting all UK government bonds, suggesting instead that only unencumbered securities with no restrictions on sale or pledge should be excluded.
According to Barclays, Bank of England data indicates this would free up banks to invest an additional £150 billion in UK government bonds. The report stated this would lower UK 10-year borrowing costs by 0.2 percentage points, saving the government £2.5 billion in interest payments.
The bank added: "Given the close relationship between gilt yields and retail mortgage rates, this could also have knock-on effects in the mortgage market, reducing borrowing costs for homebuyers."
The report found that UK banks hold relatively small amounts of domestic sovereign debt compared to their counterparts in the US and eurozone countries. This holding represents only 5% of UK bank balance sheets, approximately half the eurozone average.
Citing International Monetary Fund data, the report noted that domestic banks hold 7% of total UK sovereign debt, compared to 13% in the US, 16% in France, and 18% in Germany.
Kitty Ussher, head of Barclays policy development and a former UK Treasury official, said: "We identified a gap in the public debate, and this issue has practical relevance at a time when the supply and demand dynamics for UK gilts are particularly important. We hope to contribute to the debate."
The Bank of England is currently reviewing its leverage ratio rules, having found they impose stricter requirements on certain large, domestically-focused banks compared to their international competitors. However, regulators are likely to oppose Barclays' proposal.
In October last year, Woods described granting capital relief for banks' sovereign bond holdings as "far-reaching and highly risky," noting that "given the scale of bank sovereign bond holdings, it would allow a very significant increase in bank leverage."
The PRA chief stated: "Such a change would be equivalent to taking off our jacket, warm hat, and gloves and throwing them all over the nearest cliff."
He pointed out that the failures of Silicon Valley Bank and two other US mid-sized banks in 2023 were triggered precisely by the impact of sharply rising interest rates on their substantial portfolios of US sovereign bonds.
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