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Regulators love rules, just not necessarily those imposed upon them from another authority. With banks protesting loudly against the latest set of — post-financial crisis — international Basel reforms, local watchdogs prefer not to rush to accept these changes to bank capital.
That includes the Bank of England which has decided to postpone its implementation of new Basel rules by six months to July 2025. UK banks will no doubt hope this leads to some kind of regulatory dividend.
Getting individual countries to uniformly implement international frameworks like Basel is tricky. The final parts of Basel III, known as Basel 3.1 in the UK, irk local regulators and politicians. These would lift bank capital levels and lower profitability, which run counter to policies on improving national competitiveness.
The US has already delayed its Basel III implementation until July 2025. The EU’s choice to phase in changes slowly, with some exemptions, suggests its banks are “materially non-compliant” with the standards.
For all this, the impact to UK bank investors looks minimal. Risk weighted assets at domestic UK lenders might rise by 3 per cent in the first year, thinks Jonathan Pierce at Numis. Lloyds Bank would need an extra £1bn of common equity to keep its common equity tier one ratio at 15 per cent.
But the one size fits all global framework still creates local friction. Areas of contention include UK small business lending. New rules could make property-backed loans more expensive. Credit ratings are another example, although commonplace for private US borrowers, few UK and EU companies require them.
More importantly, the future of this highly politicised industry hangs in the balance. Too many banks in Europe and the UK do not earn their cost of capital. Many of them have traded below their respective book values since the end of the global financial crisis.
Indeed just 20 of the 85 European banks that Citi covers are valued above their 2024 tangible book value estimates. None are UK lenders.
Generalist funds have rightly steered clear of the sector. The last thing banks and their investors want is added drags on their balance sheets.
