Lenders gear up for loosening of capital rules by Bank of England

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British banks expect their capital requirements to be eased as a result of the landmark review to be published by the Bank of England next week.

Pressure has mounted on the central bank to give lenders some capital relief, after calls from ministers and City of London executives for a more pro-growth approach to free up more lending, and with the United States easing banking regulations.

This week, Chancellor Rachel Reeves wrote to the Governor of the Bank of England, Andrew Bailey, welcoming the bank’s review of capital requirements and calling on the central bank to find ways to “increase the ability of the financial sector to contribute to sustainable economic growth.”

The Bank of England’s Monetary policy Committee will present its first assessment of the six-year capital framework on Tuesday, along with the results of lenders’ annual stress tests of their balance sheets. The capital review is expected to conclude that its rules are more stringent in some regions than in other jurisdictions, including the United States and the European Union.

A senior executive at a major British bank said the sector would be watching Tuesday’s assessment more closely than this week’s budget, when banks were exempted from a sector tax rise.

One of the people familiar with the evaluation results said that it found that the leverage ratio in the United Kingdom is higher than in other countries, especially since the United States is already working to relax rules in this area.

The leverage ratio is an explicit measure that requires banks to have a fixed amount of capital in proportion to their total assets, rather than measuring those assets by risk.

The UK’s largest banks would have to meet a minimum leverage ratio of 3.25 per cent, plus additional buffers based on their systemic importance and other considerations, all of which would push the overall requirement to just over 4 per cent for larger lenders.

Banks also complain that the UK is an outlier in terms of its so-called countercyclical buffer – a “rainy day” amount of extra capital that can be released in the event of a crisis. This reserve has been set at 2 per cent of UK banks’ risk-weighted assets since 2019.

This is much higher than the equivalent requirements of 1 percent in France and Spain, 0.8 percent in Germany, and 0.5 percent in Hong Kong and Switzerland. The United States does not have a countercyclical capital reserve for its banks.

“We keep thinking about this [BoE capital review] “It is likely to be a positive stimulus for UK banks, both in terms of a potential reduction in capital requirements but also in terms of a lower cost of equity,” said Christopher Cant, banking analyst at research house Autonomous.

Jonathan Pearce, a banking analyst at Jefferies, predicted that the Bank of England could cut Tier 1 capital requirements from 14 percent to between 13 and 13.5 percent, adding that this could boost dividends and share buybacks by British banks.

The UK banking system had total tier 1 capital equal to 17.8 per cent of risk-weighted assets in the second quarter, well above the Bank of England’s assessment of the optimal level of 13.5 per cent.

Any changes to the Bank of England’s capital rules are likely to take at least several months, and the regulator could start consulting on various ideas for reform, two people familiar with the process said. The Bank of England declined to comment.

Meanwhile, the UK government is pressuring the Bank of England and other financial regulators to ease their restrictions on banks to support economic growth and competitiveness.

Reeves said in her annual terms of reference letter to the Financial Policy Committee this week that it “must identify measures that can support the provision of long-term capital for productive investment, particularly for companies with high growth potential seeking expansion”.

Sarah Breeden, the Bank of England’s deputy governor for financial stability, recently hinted that the central bank is considering relaxing leverage ratio requirements for banks.

She said she did not expect the leverage ratio to be “routinely binding on companies” when it was introduced a decade ago. She added: “When we look at British banks at the moment, we can see that it is binding on a fair number of them,” asking whether the system “is working as we expected.”