Bank of England backs down on plans to introduce tougher capital regulations for UK banks

The Bank of England has diluted new capital rules designed to shockproof the banking system against another 2008-style collapse, a move that the Labour government claims will boost their economic growth plans.

The regulator stated that it had made “substantial” changes to its earlier proposals. This means UK banks will not be required to set aside the same amount of money as they did previously. Capital buffers are a financial protection against risky loans and investments.

According to the revised plans banks will have to increase current capital buffers “less than 1 percent” in order to comply with the Basel 3.1 standards. This is a reduction from the previous proposal of a 3.2% increase last year.

Basel 3.1 consultations were conducted before Labour’s massive election victory in July. However, Treasury officials said that the final proposals of the regulator would support the government’s growth plans.

The chancellor Rachel Reeves said: “Today marks a long journey after the 2008 Financial Crisis. Britain’s banks play a crucial role in supporting the finances of ordinary people, helping to build infrastructure and help businesses grow.

These reforms will improve the resilience of the banking system in the UK and provide the banks with the confidence they need to finance growth and investment.

Andrew Bailey, Bank of England Governor, and Reeves, the Bank of England chief executive, were invited to Downing Street to discuss these changes.

The concessions in the regulatory area will likely fuel speculation about whether the banks, after the 30th October budget, be asked to pay more tax to support Labour’s economic vision. Treasury declined to comment before the fiscal event on specific tax measures.

Basel 3.1 is the last capital change to be implemented in the UK’s financial system after the 2008 crisis. Basel 3.1 marks the end of capital changes made to the UK financial system following the 2008 financial crisis.

Bank of England officials were contacted by 70 firms and groups, who submitted 126 written responses, totaling 2,000 pages, on 600+ issues, during the consultation period of two years.

The Bank stated that it had made changes when capital assessments were “too conservative”, “too expensive or difficult to implement”, or “too hard or complicated”. The regulator stated that “we have also made adjustments based on possible impacts on growth and competition”.

These changes involved reducing the proposed capital coverage for loans to small and medium-sized enterprises (SMEs). The Bank of England stated that the changes would ensure the continued support of lending to SMEs, contributing to the government’s goal of making the UK the most attractive place to start and grow a company in the world.

Also, they “simplify” the way in which residential properties are appraised and mortgage risks assessed. The Bank also eliminated the need to have more capital to cover their exposure to projects in infrastructure, as a means of “supporting” the UK’s move to net zero.

Bank officials stressed that the new rules support UK competitiveness. The rules that were implemented last year required the regulators to assess whether their actions put the City of London at a disadvantage in comparison with its international counterparts.

The increase in capital requirements for UK banks is less than 1%. This is only a fraction of what the EU has proposed, which was 9.9%. US regulators have also proposed a 9% increase, after capitulating to the heavy lobbying of banks who were incensed at original plans to raise buffers by 19%.

The UK regulations will be in force by 2026. This is before the global deadline of 2030.