BoE Set to Ease Leverage Rules, Potentially Unlocking Up to £150B of Balance Sheet for Gilts

The Bank of England is preparing to loosen parts of its leverage ratio regime, a move that could materially increase UK banks' capacity to hold government bonds. Details are expected in the Financial Stability Report due on July 7, 2026. At the heart of the review is how the leverage ratio treats bank assets. The current minimum leverage ratio is 3.25%, and it applies a blunt approach: assets receive the same balance sheet treatment regardless of risk, meaning a corporate loan and a UK gilt count equally. That structure can discourage banks from expanding gilt holdings. Under the plan being considered, unencumbered gilts would be excluded from leverage ratio calculations. In practice, "unencumbered" refers to gilts that have not been pledged as collateral in other transactions. Banks have already started sizing the potential impact. Barclays estimates that removing gilts from the leverage metric could add up to £150 billion of capacity to the gilt market. Lloyds forecasts a smaller but still significant uplift, penciling in roughly £30 billion of additional gilt demand and at least £1 billion a year in savings for the government. Analysts suggest that, aggregated across the sector, the change could lower annual debt servicing costs by close to £2.5 billion. The proposed tweak would follow other recent regulatory recalibration. In December 2025, the BoE reduced capital requirements to a 13% Tier 1 benchmark. The leverage review is seen as the next step, echoing adjustments made by US regulators in late 2025. Concerns remain over the risks of broad exemptions. Former BoE Deputy Governor Sam Woods has warned that sweeping gilt exclusions could be "highly risky." Leverage ratios were designed as a simple backstop after 2008, when risk-weighted frameworks failed to capture vulnerabilities. The UK gilt market also experienced acute stress in September 2022, when liability-driven investment strategies unraveled and the BoE stepped in with emergency bond purchases. Critics also point to concentration risk: if leverage penalties are removed, banks could tilt more heavily into gilts, leaving the sector more exposed to a single asset class. For investors, the near-term market read-through would be downward pressure on gilt yields if the reform is implemented, as stronger demand tends to lift bond prices and push yields lower. UK bank shares could also benefit, with Barclays and Lloyds among the most vocal supporters given the balance-sheet capacity that could be freed up. Fixed-income investors are expected to watch the July 7 FSR closely as a possible turning point for the gilt market.