{"id":64357,"date":"2026-07-07T07:08:15","date_gmt":"2026-07-07T11:08:15","guid":{"rendered":"https:\/\/www2.stockmarketwatch.com\/stock-market-news\/boe-warns-of-sharp-equity-correction-as-leverage-rules-face-overhaul\/64357\/"},"modified":"2026-07-07T07:08:15","modified_gmt":"2026-07-07T11:08:15","slug":"boe-warns-of-sharp-equity-correction-as-leverage-rules-face-overhaul","status":"publish","type":"post","link":"https:\/\/www2.stockmarketwatch.com\/stock-market-news\/boe-warns-of-sharp-equity-correction-as-leverage-rules-face-overhaul\/64357\/","title":{"rendered":"BoE Warns of Sharp Equity Correction as Leverage Rules Face Overhaul"},"content":{"rendered":"<h2>Key Takeaways<\/h2>\n<ul>\n<li><strong>The Bank of England (BoE) warned of a high risk of a &quot;sharp correction&quot; in equity markets<\/strong>, noting that stretched valuations now extend beyond artificial intelligence (AI) optimism.<\/li>\n<li><strong>Governor Andrew Bailey rejected calls to exempt government bonds from leverage rules<\/strong>, stating such a move would be inconsistent with international <strong>Basel agreements<\/strong>.<\/li>\n<li><strong>The Financial Policy Committee (FPC) expressed concern over &quot;simultaneous&quot; risk crystallization<\/strong>, as high leverage in equity markets and geopolitical tensions in the Middle East threaten global stability.<\/li>\n<li><strong>Deputy Governor Sarah Breeden proposed central clearing and minimum haircuts<\/strong> as more effective alternatives to bank leverage rules for addressing specific market risks.<\/li>\n<li><strong>Regulatory reforms could slash leverage ratios by 20 basis points<\/strong> for major domestic lenders like Lloyds Banking Group (<a href=\"\/stock\/LYG\">LYG<\/a>) and NatWest Group (<a href=\"\/stock\/NWG\">NWG<\/a>), potentially unlocking billions in lending capacity.<\/li>\n<\/ul>\n<p>The <strong>Bank of England<\/strong> released its July 2026 Financial Stability Report today, highlighting a precarious environment for global markets. Governor <strong>Andrew Bailey<\/strong> cautioned that the risk of a significant downturn in stock prices remains elevated, driven by valuations that appear &quot;stretched&quot; across a broader range of sectors than previously thought. While AI remains a focal point, the BoE noted that high interest rates and geopolitical shocks are compounding vulnerabilities.<\/p>\n<p>The <strong>Financial Policy Committee (FPC)<\/strong> is particularly alarmed by the &quot;substantial increase&quot; in the use of leverage within equity markets. Policymakers warned that multiple risks\u2014including volatile sovereign bond yields and pressures in private credit\u2014could &quot;crystallize simultaneously,&quot; amplifying the impact on the UK financial system. The central bank stressed that while the system remains resilient, the likelihood of a combined shock has increased since late 2025.<\/p>\n<p>On the regulatory front, <strong>Andrew Bailey<\/strong> addressed ongoing debates regarding bank capital requirements. He stated that exempting government bonds from leverage rules would violate <strong>Basel agreements<\/strong>, though he admitted there was &quot;cleaning up to do&quot; regarding rules for large domestic banks. Proposed tweaks to the leverage ratio framework could benefit major UK lenders such as Lloyds Banking Group (<a href=\"\/stock\/LYG\">LYG<\/a>), NatWest Group (<a href=\"\/stock\/NWG\">NWG<\/a>), Santander UK (<a href=\"\/stock\/SAN\">SAN<\/a>), and Nationwide.<\/p>\n<p>Deputy Governor <strong>Sarah Breeden<\/strong> offered a different path for managing market-based finance risks. She suggested that <strong>central clearing<\/strong> and <strong>minimum haircuts<\/strong> on repo transactions could serve as more targeted alternatives to broad bank leverage rules. These measures aim to curb excessive borrowing by hedge funds in the <strong>\u00a33 trillion gilt market<\/strong>, where &quot;zero haircuts&quot; have become a competitive but risky standard among dealers.<\/p>\n<p>The BoE&#39;s report also touched on the operational risks posed by rapid advances in <strong>Artificial Intelligence<\/strong>. The FPC warned that &quot;agentic AI&quot; could increase the sophistication of cyberattacks, threatening the operational resilience of major financial institutions. As a result, the bank is urging firms to follow official guidance to strengthen their defenses against AI-driven threats.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Key Takeaways The Bank of England (BoE) warned of a high risk of a &quot;sharp correction&quot; in equity markets, noting 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