The Bank of England has eased its proposed overhaul of the UK banking system, responding to industry feedback by making significant adjustments to its initial proposals. The revised package aims to support growth and competitiveness within the sector.
In a statement released today, the Bank of England announced that tier one capital requirements for major UK firms will remain largely unchanged, with an aggregate increase of less than one per cent from January 2030. This marks a reduction from the three per cent increase suggested in the last update and the six per cent estimate from earlier reports. Additionally, the enforcement of the new rules has been postponed until 2026, aligning with international jurisdictions.
Phil Evans, director of prudential policy, remarked, “We have made substantial amendments to our proposals in response to consultation feedback and evidence.” Regulators worldwide have been adjusting their interpretations of the Basel III standards, known as Basel 3.1 in the UK, in light of significant industry lobbying. Basel III, established in 2017 by the Basel Committee on Banking Supervision, a group of central banks from 28 countries, aims to enhance bank safety following the financial crisis.
The Bank of England’s announcement coincides with a similar decision by US regulators to halve the capital increase imposed on the largest Wall Street banks, following threats of legal action. The updated framework will significantly influence lending practices for small and medium-sized enterprises (SMEs) and infrastructure projects.
Initially, the proposed strategy would have required financial institutions to allocate more capital against SME loans, a move widely criticised as potentially detrimental to the sector and the broader economy. However, the revised blueprint indicates no increase in capital requirements compared to current levels, despite the removal of the SME support factor, a legacy from EU regulations. This support factor had encouraged banks to extend credit to smaller businesses by reducing the capital reserves required for such loans. The Bank of England will introduce a new, reduced risk weight for SME lending.
Evans confirmed that steps would be taken to ensure that the removal of the support factors would not lead to an increase in capital requirements for SME lending. Steven Hall, a partner at KPMG UK’s Risk and Regulatory Advisory practice, noted that it was “not surprising” the SME support factor was not retained. “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 added.
Furthermore, the Bank of England has assured there will be no increase in capital requirements for infrastructure loans, maintaining the existing measures from the time of EU-influenced regulations. Sam Woods, CEO of the Prudential Regulation Authority, stated that the new package would support growth and competitiveness while adhering to international standards.
Simon Hills, director of prudential policy at banking trade body UK Finance, expressed approval of the changes, stating they would support lending and growth in the economy, particularly in relation to SME and infrastructure lending. The new rules for smaller banks, which simplify the approach to capital for these firms, will also help support competition in the UK banking sector.
Chancellor Rachel Reeves highlighted the vital role of banks in supporting businesses, infrastructure, and ordinary people’s finances amid these regulatory changes.
The Bank of England’s adjustments to the proposed overhaul of the UK banking system reflect a balanced approach to regulatory reform. By taking industry feedback into account, the revised package aims to bolster growth and competitiveness while maintaining alignment with international standards.