Banking watchdog boss warns easing capital rules ‘highly risky’
The head of the UK’s banking watchdog has warned of high risk if the UK loosens its rules around lenders’ capital framework as the government pushes for economic growth.
Sam Woods, the head of the Prudential Regulation Authority (PRA), said requiring banks to no longer set aside capital for top-tier sovereign bonds would “be equivalent to ripping off our jacket, warm hat and gloves and throwing them all over the nearest cliff”.
A bank’s leverage ratio measures the stability of a firm through dividing its core capital by unweighted assets such as loans and bonds.
Should the bonds – often considered lower-risk – be removed from the calculation, it would require banks to hold fewer funds to cover its assets.
In a speech at Mansion House, Woods said the move would be a “profound – and highly risky – change.”
“It would allow a very large increase in bank leverage given the size of banks’ sovereign holdings,” he said.
The leverage ratio serves as a capital buffer designed to prevent banks from becoming excessively indebted, also known as highly leveraged.
Serious risk to bank balance sheets
Woods added: “Unless supervisors top up capital requirements in other ways it would risk forgetting one of the main lessons from the 2023 banking failures – that even bonds issued by sound governments, if liquidated in size, can pose serious risks to banks’ balance sheets due to interest rate risk.”
The watchdog chief’s sentiment referenced the collapse of the Silicon Valley Bank in 2023, where interest rate risk caused the lender to fail despite holding assets considered traditionally safe.
The bank was forced to sell a large amount of depreciated bonds at a significant loss to meet a massive wave of customer withdrawals, which rapidly created a capital shortfall and triggered its swift failure.
Banking industry body UK Finance proposed changes to the Leverage Ratio (LR) framework earlier this year in it “Plan For Growth.”
The body suggested exempting holding of gilts from LR calculation.
US Treasury Secretary Scott Bessent had floated the move for Wall Street giants earlier this year, arguing it could reduce yields.
Banking sector has ‘climbed the mountain’
The speech marks Woods tenth and final address at the City Regulation Mansion House event.
Woods said: “We’ve climbed the mountain and are still in one piece” but warned the world was in a “dangerous place”.
“The geopolitical landscape is bleak. Cyber attacks are relentless. New technologies, if not well governed and controlled, have the potential to cause significant disruptions.”
He said the financial services sector faces “plenty to worry about” citing “opaque and complex private lending by non-banks, recent cracks emerging in US credit and the risk of an AI bubble”.
But Woods said he was in an “optimistic frame of mind” regarding the UK banking sector.
The system has “acclimatised,” he said and added “a resilient banking system and the profit motive can comfortably co-exist with one another”.
Brexit boost
Woods said despite the challenges of Brexit, the UK was now able to “admire the view from our position outside the EU and focus more on seizing the opportunities Brexit provides to make our regime a better fit for our market”.
The regulator’s boss is set to depart his post in June 2026, with Chancellor Rachel Reeves said to be scouting an “outsider” for his new role.
The PRA is among regulators challenged by Reeves to push the government’s economic growth agenda.
Earlier this year, in a Mansion House speech of her own, Reeves said regulation was a “boot on the neck of businesses”.
A report released on Monday by the fintech industry body took a swing at the banking watchdog for “logic-defying” regulation and “excessive” requirements on challenger banks.