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The Bank of England has watered down plans to impose tougher capital rules on UK banks and delayed the introduction of the new regime until 2026.
In a statement on Thursday, the BoE’s Prudential Regulation Authority said the changes included easing capital requirements on small business lending, mortgages, trade finance and infrastructure loans.
As a result, the key capital thresholds for the main banks would be “virtually unchanged”, rising less than 1 per cent, the PRA said. That is a reduction from its earlier estimate of a 3 per cent increase.
The revised plans are part of the Basel III regime, which was first drawn up more than a decade ago to increase the amount of equity available to absorb stress in banks and to avoid a repeat of the state bailouts that followed the 2008 financial crisis.
Sam Woods, head of the PRA, said the proposals would “support growth and competitiveness while also ensuring that the UK aligns with international standards”.
The changes followed heavy lobbying by the industry and come days after the US Federal Reserve cut a proposed increase to capital requirements for the largest US banks by more than half after a backlash from the industry and politicians. Earlier this year, EU regulators postponed the implementation of part of their reforms.
Shares in the UK’s biggest banks climbed in early trading, with Barclays, Lloyds Banking Group, HSBC and NatWest rising between 1 and 2 per cent.
UK chancellor Rachel Reeves, who is meeting UK bank bosses on Thursday, welcomed the proposals, saying they would “strengthen the resilience of our banking system and deliver the certainty banks need to finance investment and growth”.
Barclays chief executive C S Venkatakrishnan said he was pleased with the BoE’s adjusted plan, calling it “a welcome step forward”.
But he added that he would “await the detail” and look at how it fits with the “broader capital regime”, the BoE banking stress tests and “the respective timescales for implementation across the UK, US and the EU”.
Some economists fear the shift by global financial regulators to dilute the Basel rules could encourage banks to increase risk-taking and sow the seeds of the next crisis.
“Generally in the past these episodes have not ended well,” said Nicolas Véron at the Bruegel Institute, a policy research group in Brussels. “The time it takes for things to end badly varies of course, but it has to be a concern to anyone watching what is going on.”
The rules restrict how much banks can lower the capital they need to support different types of lending and other exposures.
“In some cases, we have made changes where the evidence suggested too much conservatism in our original proposals,” said Phil Evans, the PRA’s director of prudential policy. “We have also made changes where the proposals would have been too difficult or costly to implement in practice.”
The PRA said it would reduce the limit for small business lending from 100 per cent risk-weighting to 85 per cent, while offsetting the remaining impact of this by adjusting requirements for individual banks.
“SME lending matters for growth,” said Evans, adding that the PRA had made similar adjustments for infrastructure lending, lowering capital requirements for “higher-quality lending”, and for residential mortgages, to make them “more risk-sensitive and operationally simpler”.
The regulator also sought to address fears that the rules could disproportionately harm smaller digital banks and fintechs by introducing a simpler regime for lenders with less than £20bn of assets. Called the small domestic deposit taker criteria, it will come into force in 2027.
The PRA had aimed to publish its planned rules this summer but had to postpone the release due to the UK general election.
It is the first time the UK has had free rein to decide how to implement the rules, as previous versions before Brexit were largely dictated by the EU.
The PRA said it also took into account its new secondary objective to support growth and competitiveness, which was introduced by the Conservative government last year.