The Bank of England has watered down new capital rules meant to shock-proof the banking system from another 2008-style crash, in a move the Labour government says will bolster its economic growth plans.
The regulator said it had made “substantial changes” to earlier proposals, meaning UK banks would not have to set aside as much money for capital buffers as previously planned. Capital buffers provide a financial cushion against risky lending and investments on bank balance sheets.
Under the revised plans, banks would have to increase their current capital buffers by “less than 1%” to abide by the so-called Basel 3.1 standards. That is down from previous proposals for a 3.2% rise last year.
While Basel 3.1 consultations pre-dated Labour’s landslide election win in July, the Treasury said the regulator’s final proposals would help support the government’s growth plans.
The chancellor, Rachel Reeves, said: “Today marks the end of a long road after the 2008 financial crisis. Britain’s banks have a vital role to play in helping businesses to grow, getting infrastructure built and supporting ordinary people’s finances.
“These reforms will strengthen the resilience of our banking system and deliver the certainty banks need to finance investment and growth in the UK.”
The chief executives of the UK’s largest banks – including HSBC, Barclays, Lloyds and Barclays – were summoned to Downing Street on Thursday to discuss the changes with Reeves and the Bank of England governor, Andrew Bailey.
The regulatory concessions are likely to fuel speculation over whether banks will be asked to do more to support Labour’s economic vision, including by paying more tax after the budget on 30 October. The Treasury has declined to comment on specific tax measures before the fiscal event.
Basel 3.1 marks the end of post-2008 crisis capital changes to be applied to the UK financial system. Regulators around the world have had to decide how to apply the global rules in a way that would ensure banks are less likely to be the source of a calamitous financial crisis, similar to the one experienced in 2008, which forced governments to spend billions of pounds to bail out lenders and prevent a financial meltdown.
The Bank’s decision to cut back the capital requirements follows strong lobbying by the City, with firms and industry groups having held 70 meetings with Bank of England officials, and submitted 126 responses – totalling 2,000 pages – on more than 600 issues during the two-year consultation.
The Bank said it made changes where capital assessments were deemed to be “too conservative” or “too difficult or costly to implement”. “We have also made changes based on the possible impact on growth and competitiveness,” the regulator said.
Those changes have involved lowering the proposed capital cover for loans to small-and medium-sized businesses (SMEs). “This will mean lending to SMEs continues to be supported, helping to deliver the government’s ambition to make the UK the best place in the world to start and grow a business,” the Bank of England said.
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They also involve “simplifying” the way residential properties are valued and the way mortgage risks are assessed. The Bank has also eradicated the need to hold more capital against their exposure to infrastructure projects in a way that is “supporting the UK’s transition to net zero”.
Officials at the Bank emphasised that the new rules supported UK competitiveness. Rules that came into force last year required regulators to consider whether they were putting the City at any disadvantage compared with its international peers.
At less than 1%, the increase to UK banks’ capital requirements is a fraction of the 9.9% proposed by the EU. US regulators are also proposing a 9% rise, having capitulated to heavy lobbying by banks that had been incensed by original plans to raise financial buffers by 19%.
The UK rules will come into force in 2026, before a global deadline of 2030.