Bank of England Set to Ease Capital Rules and Unlock Billions in Lending

The Bank of England is preparing to announce wide ranging changes to the rules that require banks to hold capital as a safeguard against failure. This move, expected later in the week, has attracted close attention from the banking sector, which anticipates greater lending flexibility after years of rising capital requirements. The changes come soon after the government explicitly encouraged the Bank to find a balance between stability, growth, and competitiveness within the UK financial system.

Since 2015, banks in the United Kingdom have collectively built up an additional £54 billion in capital, according to a report by the lobby group UK Finance. This accumulation, the report notes, has constrained lending capacity on a major scale, equating to an estimated £2 trillion in potential mortgage lending or nearly £1 trillion to small businesses. The industry hopes the review will recognise this restriction and allow for a reduction in the amount of capital banks must hold without undermining financial stability.

The current framework has become increasingly complex, involving various pillars and buffers designed to provide resilience both in normal times and during financial stress. However, concerns have been raised that not all of these measures are functioning as intended. Often, banks tend to retain capital in the system even when some buffers should be drawn upon in periods of market turbulence. Sarah Breeden, a deputy governor at the Bank of England, highlighted that some buffers have failed to operate flexibly and that the leverage ratio, intended as a backstop, has become more binding on institutions than initially expected.

The Financial Policy Committee has spent the past six months reviewing the capital framework. Its findings, due for publication on Tuesday, will set the tone for further consultation on potential reforms. Analysts, including Jonathan Pierce at Jefferies, note that the total capital ratio for banks could be trimmed from the current 14 percent to around 13 or 13.5 percent. Such a change would free up resources across the sector, potentially boosting lending to households and businesses, and providing tailwinds to the government’s economic growth ambitions.

UK Finance is urging the authorities to consider whether the evidence now supports a rebalancing of regulatory requirements. Excessive capital, its report argues, is starting to impede economic growth, delivering little additional benefit to financial stability. The sector will be watching closely as the Bank of England sets out its proposals for a simpler, more effective capital regime in the coming months.