The Bank of England is preparing to water down changes to its post-crisis rulebook after lenders warned plans to raise bank buffers will suffocate small businesses and hurt the economy.
It is understood regulators are exploring ways to lower the burden on banks when the UK adopts new international capital rules from 2025.
The Prudential Regulation Authority (PRA) published a consultation in November suggests UK lenders will be forced to hold back billions of pounds more than their EU rivals due to the UK’s strict adoption of the rules.
While the PRA still insists on robust implementation, regulators are seeking a “middle ground” on small business lending that involves a transition period from the current framework.
It is also considering building on existing lending schemes and adopting a common sense approach to risk, which high street banks say will tie up less money on balance sheets which they will use to boost the economy.
Ensuring that UK banks and businesses are not left at a competitive disadvantage is one of them most politically sensitive issues as the bank completes its implementation of the next phase of the so-called Basel rules introduced in the wake of the 2008 financial crisis.
It follows a fierce battle with the government and the financial sector over insurance regulations. Regulators were accused of suffocating the city in red tape and stifling investment in high-growth assets.
The latest battle over Britain’s regulatory future has seen Barclays and Natwest, two of Britain’s biggest lenders, warned in March that they could be forced to set aside an extra £50bn. to comply with the standards.
Smaller banks fear that they will be hit even harder. Some believe that the changes will lead to an increase of 1 per cent. of the cost of lending to small businesses, while lender Allica has warned that up to £44bn of SME lending is at risk unless changes are made to the current proposals.
Banks have asked the PRA to remove its “illogical” approach to the so-called “SME support factor”, an EU legacy rule that allows banks to reduce capital requirements for credit risk on exposure to small and medium-sized businesses.
The PRA proposed removing the aid to comply with international standards, although Brussels intends to keep it.
Banking lobby group UK finance has pushed back against the PRA’s approach, warning that the changes “almost always result in higher requirements in the UK” compared to US and EU rivals.
It warned that by removing the special treatment for lending to small businesses “the cost of lending to a critical component of the UK economy will increase and the appetite for lending will be reduced”.
UK Finance is calling on the PRA to fix a quirk in the Basel framework that means secured lending to small businesses is currently considered riskier than its unsecured counterpart.
“You would have thought that if you have some kind of collateral, like a mortgage attached to your store or warehouse, it would be less risky. And so you should have to hold less capital,” said one bank official who has written for PRA.
The changes are being considered after regulators were ordered by the government to promote the financial sector through a secondary goal of competitiveness and economic growth. Ministers are likely to put pressure on the PRA to go ahead.
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