In a significant policy shift, the Bank of England has revised its proposed plans for overhauling the UK banking system. This move comes in response to industry feedback and promises to support growth and competitiveness.
Officials have confirmed that changes to tier one capital requirements for major UK firms will remain almost unchanged, with an aggregate increase of less than one per cent from January 2030. This adjustment is notably less severe than previous estimates.
Capital Requirements and Implementation Timeline
The Bank of England announced that the tier one capital for major UK firms would see an aggregate increase of less than one per cent from January 2030. This is a reduction from the last estimate of three per cent in December and a far cry from an earlier six per cent projection.
Furthermore, the enforcement timeline for these rules has been adjusted. Compliance is now scheduled for 2026, a six-month delay, aligning the UK with other international regulatory jurisdictions.
Industry Response and Regulatory Adjustments
Phil Evans, the director of prudential policy, mentioned that substantial amendments were made in response to consultation feedback and evidence. The industry’s strong pushback against the stringent rules has been a critical factor in these adjustments.
Globally, regulators have been refining their interpretations of the Basel III standards, known in the UK as Basel 3.1, amid robust lobbying efforts. These standards, established by the Basel Committee on Banking Supervision, aim to enhance banking safety post-financial crisis.
Impact on SMEs and Infrastructure Financing
Significant changes to the Bank of England’s framework will affect lending landscapes, especially for small and medium-sized enterprises (SMEs) and infrastructure projects.
Originally, the strategy required financial institutions to allocate more capital against SME loans, a move criticised for potentially harming the sector and the broader economy. However, the revised plan indicates no increase in capital requirements for SME loans despite removing the SME support factor, introduced by EU regulations.
Instead, a new, reduced risk weight for SME lending will be adopted. Phil Evans has reassured steps will be taken to ensure the removal of support factors does not result in increased capital requirements for SME lending.
Reactions from Financial Experts
Steven Hall, a partner at KPMG UK’s Risk and Regulatory Advisory practice, noted that the omission of the SME support factor was not surprising, but the industry would welcome amendments ensuring capital requirements for SME lending remain stable.
In addition, the Bank of England has committed to maintaining no increase in capital requirements for infrastructure loans. This assurance retains the status quo from previous EU-influenced regulations.
Broader Economic Implications
Sam Woods, CEO of the Prudential Regulation Authority, stated that the revised package would support growth and competitiveness while adhering to international standards.
Simon Hills, director of prudential policy at UK Finance, commended the changes, noting they support lending and economic growth, particularly regarding SME and infrastructure lending.
Hills also highlighted the benefits for smaller banks, which will experience a simplified approach to capital requirements, fostering greater competition within the UK banking sector.
Government and Legislative Perspective
Chancellor Rachel Reeves recognised the crucial role of banks in driving economic growth, infrastructure development, and supporting household finances. Her remarks underline the importance of regulatory frameworks in balancing economic growth with financial stability.
Reeves’ comments reflect the government’s acknowledgement of the banking sector’s role in the broader economic landscape, highlighting the significance of balanced regulatory policies.
Summary of Key Changes
The revised framework includes minor adjustments to tier one capital requirements, postponed enforcement timelines, and improved conditions for SME and infrastructure lending. These changes are designed to foster growth and maintain competitiveness in the UK banking sector.
The Bank of England’s decision to revise its overhaul plans represents a balanced approach to regulatory reform. It addresses industry concerns while maintaining a focus on economic growth and competitiveness.
These changes are pivotal in ensuring a robust and adaptable banking environment, aligned with international standards, that supports SMEs, infrastructure projects, and overall economic stability in the UK.
