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The Bank of England has denied watering down new lending rules after revealing that big banks would face almost no increase to their core capital requirements under reforms designed to make the industry safer following the 2007-9 financial crisis.
On Thursday, the Bank’s Prudential Regulation Authority (PRA) unveiled a series of concessions on its plan to implement international standards known as Basel 3.1, which have been years in the making and have been the subject of intense lobbying by lenders.
It said these changes meant that the tier 1 capital requirements for major lenders will be “virtually unchanged” by its proposals and would increase in aggregate by less than 1 per cent when the rules fully come into force in 2030. This is down from the 3 per cent figure when it last gave an update on its plans in December and an earlier estimate of 6 per cent.
In a further boost for lenders, the regulator also again pushed back the deadline for banks to begin implementing the new rules to January 2026, giving the industry an extra six months. This followed a previous six-month extension.
The overhaul came two days after the US Federal Reserve, which also faced pressure from banks, revealed it was revamping its Basel package to halve the capital increase that the largest American lenders will face.
Phil Evans, director of prudential policy at the PRA, insisted the British regulator’s changes did not represent a relaxation of the reforms, which are based on global standards set by the Basel Committee on Banking Supervision, a global financial watchdog.
“I would not describe it as a watering-down,” he said, adding that the authority’s work had been evidence-based and had involved listening to firms.
Evans also stressed that the regulator’s approach had given “a significant role for considerations” around competitiveness and growth. It comes after the previous Conservative government handed the PRA and the Financial Conduct Authority a new secondary objective to consider these two factors when making rules, as part of efforts to bolster the UK economy. Regulators have been under pressure in recent months to show they are taking the new objective into account.
Rachel Reeves, the chancellor, who has made increasing growth in the UK economy a priority for the new Labour government, welcomed the authority’s package, saying: “Britain’s banks have a vital role to play in helping businesses to grow, getting infrastructure built and supporting ordinary peoples’ finances.”
On Thursday, she held a meeting at Downing Street with the bosses of leading lenders and Andrew Bailey, the Bank governor, to discuss the measures, which the regulator detailed over about 1,750 pages.
Rachel Reeves, the chancellor, and Andrew Bailey, the governor of the Bank of England, met banking leaders to discuss the Basel 3.1 reforms and the future of the sector, at No 11 Downing Street
KIRSTY O’CONNOR / TREASURY
Small business and infrastructure lending
A big area of concern for both businesses and banks was the way the regulator planned to treat lending to small- and medium-sized enterprises (SMEs) under the Basel reforms. Earlier proposals made by the PRA had prompted warnings from lobby groups, including the Confederation of British Industry and the Federation of Small Businesses (FSB), that the regulator’s approach would stymie lending to SMEs, a key area of the economy.
It has now sought to address these worries with what Evans called “significant changes” in its final package of rules, which the authority said would result in no increase in capital requirements for banks in relation to their SME exposures.
“We understand this matters for growth,” Evans said of small business lending. He described the revisions the regulator has made in this area as a “strong” example of where “competitiveness and growth considerations have played an important role” in shaping the PRA’s final set of rules.
Another example he gave was changes to the regulator’s treatment of infrastructure lending, which now will also lead to no rise in capital requirements for banks.
“In parallel with the approach for SME lending, we are also very aware of the wider considerations around the impact on growth,” Evans said.
Martin McTague, the national chair of the FSB, said that small businesses would greet the package “with cautious optimism” butadded: “The overwhelming imperative is that the PRA will change course if, on close examination, they have got this wrong.”
Mortgages and trade finance
Residential mortgages are an example of “where feedback from firms has helped to make our proposals more efficient,” Evans said, adding that the regulator had “received persuasive arguments to make our proposals on origination valuation more risk sensitive and operationally simpler”.
The authority has also tweaked its planned rules for trade finance after receiving what Evans called “convincing data” that its previous approach “was too conservative and not commensurate with the risk”.
Deadlines
This has been another big source of concern for the banking industry amid worries that British lenders risk facing an unfair playing field with rivals overseas if they are forced to implement the new rules before their foreign competitors.
The PRA last year announced it would delay the deadline for banks to begin a phased implementation of the Basel package by six months to July 2025, partly to keep the UK process in step with the US.
Since then, however, European regulators have pushed back the deadline for bringing in a central part of their Basel package, relating to investment banks’ trading books, to January 2026 and it is now unclear when the US will implement its rules. The calling of a general election in Britain also delayed the PRA’s plan to announce its final set of rules.
As a result, on Thursday the British regulator announced that it had pushed back its implementation deadline again, to the start of January 2026. This means UK banks will have a four-year transitional period before the deadline for full adherence to the new rules, which is the beginning of 2030.
Smaller banks
In addition to its Basel package, the authority also set out its proposals for new capital rules for smaller, domestic-focused lenders, dubbed its “strong and simple” framework.
It plans to bring in these changes from the start of 2027 and said its proposals represented “significant progress towards tackling many of the issues with current regulation that small firms have raised in previous years”.