The Bank of England (BoE) has announced a significant easing of bank capital requirements, marking the first reduction since the global financial crisis. The benchmark for Tier 1 capital requirements, previously set at 14% in 2015, has been lowered by one percentage point to 13%. This adjustment is part of a broader effort to boost lending and stimulate the UK economy. BoE Governor Andrew Bailey stated that this change reflects the evolution of the banking system and current economic conditions, urging banks to use the freed-up funds to increase lending to households and businesses rather than rewarding shareholders. Banking executives and investors had anticipated some form of easing, particularly as regulators in other jurisdictions, such as the U.S., were also preparing to soften their rules.
In addition to the Tier 1 capital reduction, the BoE's Prudential Regulation Authority (PRA) is proposing to relax capital rules specifically for investment banks' trading activities. This move aims to align the UK with international markets and prevent UK banks from being at a competitive disadvantage against global peers. The PRA estimates that allowing banks to use internal models instead of the advanced standardized approach could cut capital requirements by about a third, approximately $£700$ million. This proposal also involves delaying the full implementation of the Basel III market risk framework until January 2028.
The BoE's half-yearly Financial Stability Report confirmed these changes and also revealed that the seven biggest lenders in the UK had all successfully passed its latest stress tests, which assess their resilience to severe macroeconomic and financial shocks. The new 13% Tier 1 capital level comprises an optimal level of 11% plus two percentage points to address existing gaps and shortcomings in risk-weighted asset measurement. Analysts noted that the reduction in capital demands would partly come from the implementation of global banking rules known as Basel 3.1 in 2027. Shares in major UK banks, including HSBC, Barclays, Lloyds Banking Group, and NatWest, rose between 1% and 1.5% following the announcements, outpacing the broader market.
