BoE plans to loosen capital rules on banks in latest easing of post-2008 controls | Banking

The Bank of England plans to ease capital rules for high street banks for the first time in a decade, the latest effort to loosen rules designed to protect the UK economy in the wake of the 2008 financial crisis.

The central bank has proposed reducing capital requirements related to risk-weighted assets by one percentage point to about 13%, which should reduce the amount of reserves held by lenders. The move is designed to make lending to households and businesses easier.

Capital requirements act as financial support against risky borrowing and investing on bank balance sheets.

It came as fresh stress tests showed Britain’s seven biggest banks – Barclays, Lloyds Banking Group, Nationwide, NatWest, Symantec UK and Standard Chartered – are strong enough to continue lending despite a “severe but probable” economic downturn.

The bank said its proposed new capital rules were “in line with its view that the banking sector can support long-term growth in the real economy in both the current and adverse economic environments”.

It states that banks tend to hold more capital than is required, which means the money is not used to issue loans.

“Banks should have greater certainty and confidence in using their capital resources to lend to UK households and businesses,” the Bank’s Financial Policy Committee said.

The central bank announced it would review capital levels in June, after they were last assessed in 2019. It said that, since capital levels were last reviewed, banks had managed to expand lending and mortgage issuance despite “numerous macroeconomic shocks”, including Covid and Russia’s full-scale invasion of Ukraine.

Chancellor Rachel Reeves has put additional pressure on regulators to do more to encourage growth, saying this summer that regulations and red tape were a “boot on the neck” of businesses and risked “stifling” innovation across the UK.

The move could raise concerns about weakening protections against UK bank failures, as the government continues to tighten regulations introduced after the 2008 financial crisis.

Reeves last week appeared to subtly encourage a cut in bank capital requirements. In a letter to Bank Governor Andrew Bailey released with the Budget, she said she welcomed the review of bank capital requirements, and said the process should “ensure that the UK capital framework maintains the optimal balance to deliver resilience, growth and competitiveness”.

“The next phase of this work should identify actions that can support the supply of long-term capital for productive investment, particularly for companies with high growth potential,” the Chancellor’s letter said.

Banks will be under pressure to do more to support the UK economy after avoiding higher taxes and emerging as one of the biggest winners of the Budget.

The bank warned on the risks of increasing valuations of artificial intelligence companies this year, saying it “increases the risk of a sharp correction”.

“Equity valuations in the US are near their highest stretch since the dotcom bubble and in the UK since the global financial crisis. This raises the risk of a sharp correction,” it said. It had expressed similar concerns last month.