London (Parliament Politics Magazine) – The Bank of England has relaxed new capital rules pointed to shock-proof the banking system from another 2008-style crash, in a motion the Labour government states will bolster its economic growth plans.
The regulator stated it had made “substantial changes” to earlier suggestions, meaning UK banks would not have to put aside as much money for capital buffers as previously scheduled. Capital buffers deliver a financial cushion against dangerous lending and investments on bank balance sheets.
What impact will the revised capital rules have on UK banks and their lending practices?
Under the revised plans, banks would have to improve their current capital buffers by “less than 1%” to take by the so-called Basel 3.1 standards. That is down from previous recommendations for a 3.2% rise last year. Basel 3.1 talks pre-dated Labour’s landslide election victory in July, the Treasury said the regulator’s final proposals would allow support the government’s growth plans.
How does the Bank of England’s decision support the Labour government’s economic growth plans?
The chancellor, Rachel Reeves, stated: “Today marks the end of a long road after the 2008 financial crisis. Britain’s banks have a vital function to play in helping businesses to grow, getting infrastructure built and helping ordinary people’s finances. These reforms will support the resilience of our banking system and deliver the certainty banks need to finance investment and growth in the UK.”
Why did the Bank of England decide to ease the capital buffer requirements?
The chief executives of the UK’s largest banks – including HSBC, Barclays, Lloyds and Barclays – were called to Downing Street to examine the changes with Reeves and the Bank of England governor, Andrew Bailey. The regulatory concessions are possible to fuel speculation over whether banks will be invited to do more to support Labour’s economic vision, including by giving more tax after the budget on 30 October.
Basel 3.1 keeps the end of post-2008 crisis capital modifications to be applied to the UK financial system. Regulators around the world have had to determine how to apply the global rules in a way that would ensure banks are less likely to be the source of a catastrophic financial crisis, similar to the one encountered in 2008, which forced governments to pay billions of pounds to bail out lenders and avert a financial meltdown.
The Bank stated it made changes where capital assessments were considered to be “too conservative” or “too difficult or costly to implement”. “We have also created changes based on the possible effect on growth and competitiveness,” the regulator stated. Those changes have affected lowering the proposed capital cover for loans to small-and medium-sized businesses (SMEs). “This will mean loaning to SMEs continues to be supported, allowing to deliver the government’s ambition to drive the UK the best place in the world to start and grow a business,” the Bank of England expressed.