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The Bank of England has relaxed a proposed overhaul of the UK banking system, with officials arguing the updated package will support “growth and competitiveness”.
In a statement today, the BoE said that tier one capital for major UK firms will be “virtually unchanged”, with an aggregate increase of less than one per cent from January 2030. That’s down from three per cent in its last update in December and an earlier estimate of six per cent.
The implementation of the rules will be delayed until 2026, six months later than it said previously, but in line with other international jurisdictions.
“The bottom line is that we have made substantial amendments to our proposals in response to consultation feedback and evidence,” Phil Evans, director of prudential policy, said in a speech published on Thursday.
Regulators around the world have been refining their interpretations of international standards known as Basel III amid strong industry lobbying to make them less stringent.
Basel III, known as Basel 3.1 in the UK, was introduced in 2017 by the Basel Committee on Banking Supervision – a group of central banks from 28 countries. It is the latest in a series of Basel Accords aiming to make banks safer following the financial crisis.
The BoE’s announcement comes just days after US regulators announced they would halve the capital increase faced by the biggest Wall Street banks after some threatened lawsuits over the rules.
The major changes to the BoE’s package related to the treatment of lending to small and medium-sized enterprises (SMEs) and infrastructure lending.
The BoE’s initial plans would have required lenders to hold more capital against loans to SMEs, which many in the industry argued would have been damaging to the sector and the economy more broadly.
However, the updated proposals suggest there will be “no increase in capital requirements” relative to today, even though the BoE has decided to remove the SME support factor.
The SME support factor, inherited from the EU, was essentially an incentive for banks to lend to small businesses by lowering the amount of capital lenders had to hold against those loans.
In its place, the BoE has adopted a new lower risk weight for SME loans. Evans also pledged to “take steps… to ensure that the removal of the support factors does not result in an increase in capital requirements for SME lending”.
Steven Hall, a partner in KPMG UK’s Risk and Regulatory Advisory practice, said it was “not surprising” that the BoE had not kept the SME support factor.
“But banks and the industry will be pleased that adjustments will be made elsewhere to ensure the capital required for SME lending doesn’t go up,” he said.
The BoE also confirmed that there will be “no increase in capital requirements” for infrastructure lending, another area where lenders had inherited an EU-era support factor.
Sam Woods, chief executive of the Prudential Regulation Authority (PRA), said the package will “support growth and competitiveness” while also aligning with international standards.
Simon Hills, director of prudential policy at banking trade body UK Finance, said the group welcomed the PRA’s changes, which would “support lending and growth in the economy, most notably around the overall capital impact and the approach to SME and infrastructure lending”.
“We also welcome the new set of rules for smaller banks as they simplify the approach to capital for these firms and will help support competition in the UK banking sector,” he added.
Chancellor Rachel Reeves said: “Britain’s banks have a vital role to play in helping businesses to grow, getting infrastructure built and supporting ordinary peoples’ finances.”