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The Bank of England has halved its estimate of how much extra capital UK banks will have to hold when new global rules are fully adopted by 2030.
The BoE said on Tuesday its aggregate tier one capital requirements for UK banks would rise by 3 per cent when the package, dubbed as Basel 3.1, comes into force.
The 3 per cent increase is lower than the BoE’s previous estimate of 6 per cent a year ago. The central bank revised its forecast after conducting a more detailed analysis of the measures’ impact.
The announcement came as its regulatory arm, the Prudential Regulation Authority, unveiled tweaks to its plans to incorporate the Basel 3.1 measures after “extensive engagement with interested parties”.
The expected impact on UK lenders is likely to be reduced further once the latest changes to the PRA’s plans are factored in. The 3 per cent is also a fraction of the 16 per cent that banks in the US have previously objected to.
“The focus of these rules is not on the aggregate amount of capital in the system but on making sure that risk is properly captured across a range of firms and activities,” said Sam Woods, PRA chief executive.
The raised demand does not necessarily mean banks will have to ask investors for more capital, since most lenders hold additional resources and can accumulate capital through profits.
The update on Tuesday covered the PRA’s plans for two of the most complex areas of bank risk, including the treatment of trading books and derivatives exposures, alongside other aspects like counterparty credit risk and operational risk.
The BoE has promised to announce the rest of the package, including the treatment of small business loans, in the second quarter of next year. The rules will be introduced from mid-2025, and will be phased in over four and a half years.
The PRA, which received 126 industry submissions on the package, said it had changed several parts of the plan including the treatment of some sovereign exposures and granting “added flexibility” in handling of derivative risks.
Billed as the final phase of post-crisis global capital reforms, the measures are designed to reduce big banks’ ability to use internal models to understate their riskiness and justify carrying less capital.
The BoE, which has secondary mandates to promote competition in the UK market and the competitiveness of Britain’s banking sector, said its package would deliver on both counts.
The “rules will facilitate effective competition by narrowing the gap between the risk weights calculated under internal models [typically used by the larger firms] and the standardised approaches and support international competitiveness by aligning with international standards,” the BoE wrote.
“They will also promote the safety and soundness of the firms the PRA regulates and make capital ratios more consistent and comparable.”
The EU, whose banking supervisor has said the bloc’s watering down of capital standards risked damaging the banks credibility, has announced a January 2025 adoption but is under pressure from banks to align with the UK and US’s mid-year implementation target.
