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The Bank of England is planning to ease capital rules for high street banks for the first time in a decade, marking the latest attempt to loosen regulations designed to protect the UK economy in the wake of the 2008 financial crisis.
The central bank has proposed lowering capital requirements related to risk weighted assets, by one percentage point to about 13%, reducing the amount lenders must hold in reserve. The move is designed to make it easier to lend to households and businesses.
Capital requirements act as a financial cushion against risky lending and investments on bank balance sheets.
It came as fresh stress tests showed that the UK’s seven largest banks – Barclays, Lloyds Banking Group, Nationwide, NatWest, Santander UK and Standard Chartered – are strong enough to continue lending through “a severe but plausible” economic downturn.
The Bank said its proposed new capital rules were “consistent with its view that the banking sector can support long-term growth in the real economy in both current and adverse economic environments”.
It added that banks have tended to hold more capital than required, meaning that money is not used to issue loans.
“Banks should have greater certainty and confidence in using their capital resources to lend to UK households and businesses,” the Bank’s financial policy committee said.
The central bank announced it would be reviewing capital levels in June, having last assessed them in 2019. It said that, since the capital levels were last reviewed, banks had managed to continue issuing loans and mortgage despite “several macroeconomic shocks” including Covid and Russia’s full-scale invasion of Ukraine.
The chancellor, Rachel Reeves, has put extra pressure on regulators to do more to stimulate growth, having this summer gone so far as to say that rules and red tape were a “boot on the neck” of businesses and risked “choking off” innovation across the UK.
The move could stoke concerns about weakening protections against UK bank failures, as the government continues to row back on regulations introduced after the 2008 financial crisis.
Reeves appeared to subtly encourage cuts to bank capital requirements last week. In letter to the Bank’s governor, Andrew Bailey, released alongside the budget, she said she welcomed the review of bank capital requirements, adding that the process should “ensure the UK’s capital framework strikes the optimal balance to deliver resilience, growth and competitiveness”.
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“The next steps in this work should identify actions that could support the supply of long-term capital for productive investment, particularly for high growth-potential firms seeking to scale up,” the chancellor’s letter added.
There will also be pressure on banks to do more to support the UK economy after they narrowly escaped higher taxes and emerged among the biggest winners of the budget.
The Bank warned over the risks of the rise in valuations of artificial intelligence companies this year, saying that this “heightens the risk of a sharp correction”.
“Equity valuations in the US are close to the most stretched they have been since the dotcom bubble, and in the UK since the global financial crisis. This heightens the risk of a sharp correction,” it said. It expressed similar concerns last month.
