The Bank of England is preparing to water down changes to its post-crisis rulebook after lenders warned plans to raise bank buffers will strangle small businesses and harm the economy.
It is understood that regulators are examining 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 that suggests British lenders will be forced to hold back billions of pounds more than their EU rivals because of the UK’s strict adoption of the rules.
While the PRA is still insisting on a robust implementation, regulators are seeking a “middle ground” on small business lending involving a transition period from the current framework.
It is also considering grandfathering existing loan arrangements and adopting a common sense approach towards risk that high street banks say will tie-up less money on balance sheets that they will use to boost the economy.
Ensuring UK banks and businesses are not left at a competitive disadvantage is one of the most politically sensitive issues as the Bank finalises its implementation of the next stage of so-called Basel rules introduced in the wake of the 2008 financial crisis.
It follows a bruising battle with the Government and financial services sector over insurance rules. Regulators were accused of strangling the City in red tape and stopping investment in high-growth assets.
The latest tussle over Britain’s regulatory future has seen Barclays and Natwest, two of Britain’s biggest lenders, warn in March they could be forced to set aside an extra £50bn to comply with the standards.
Smaller banks fear they will be hit even harder. Some believe the changes will lead to a 1pc increase to the cost of small business lending, 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 enterprises.
The PRA proposed removing the support to comply with international standards, even though Brussels intends to retain it.
Bank lobby group UK finance has led the backlash against the PRA’s approach, warning that the changes “nearly always result in higher requirements in the UK” compared with US and EU rivals.
It warned that by removing the special treatment of small business lending “the cost of lending to a critical component of the UK economy will increase and lending appetite reduce”.
UK Finance is urging the PRA to rectify a quirk in the Basel framework that means secured lending to small businesses is currently deemed more risky than its unsecured equivalent.
“You would have thought that if you’ve got some sort of security, like a mortgage tied to your shop or warehouse, that will be less risky. And so you should have to hold less capital,” said one banking official who has written to the PRA.
The changes are being considered after regulators were ordered by the Government to promote the financial sector through a secondary competitiveness and economic growth objective. Ministers are likely to pile pressure on the PRA to go further.
