UK Banks Equity and UK Rates Strategy | Europe: July FSR: Leverage Ratio Framework Revised

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UK Banks Equity and UK Rates Strategy | Europe: July FSR: Leverage Ratio Framework Revised

UpdateMwider additional balance-sheet capacity is used for repo-related activity, this could

add c.£30-40bn of intermediation capacity. While modest relative to the size of the

market, the additional capacity should support collateral intermediation, inventory

warehousing and client financing, particularly around reporting dates or periods of

collateral scarcity. On the negative side, as noted above, the repo-haircut headlines

are a headwind for repo activity and valuations.

For banks, the reform is incrementally positive, but it does not change the equity

story. The reform gives banks more room to use their balance sheets. Together with

the ring-fencing proposals, and the expected reduction in P2As with the

implementation of Basel 4 on 1st of Jan, all should contribute to improve sentiment

towards the sector and allow HSBC and possibly Barclays to reduce their go to CET1

targets (see UK Banks Equity and UK Rates Strategy: UK Leverage Ratio Review (8

Jun 2026)). Barclays remains our Top Pick in the UK, we are also Overweight Lloyds

and Standard Chartered.

Exhibit 1: The proposal brings UK leverage ratio requirements closer to

international standards

UK Leverage Ratio Min Central Bank

requirements Requirement Buffers claims

Current Approach 3.25% 35%*(CCyB + GSIB/OSII buffer) Excluded

What we expected 3.0% 50%*GSIB/OSII buffer rate Included

Proposal 3.0% 0.25% (general LR buffer) + 50%*GSIB/OSII buffer Excluded

Source: Bank of England, Morgan Stanley Research

Exhibit 2: The new leverage ratio requirements could lead to c.£70-140bn of

additional gilt demand by Domestic banks

Current approach Proposed approach Increase in demand for gilts MS estimates