Bank of England mulls ‘further steps’ to boost City’s global competitiveness
The UK’s banking regulator is mulling “further steps” to boost the City’s international competitiveness as one of its top brass hailed a “broadly welcoming” response to its softening of bank capital rules.
David Bailey, the Bank of England’s executive director for prudential policy, told Morning Wire that a growth mandate imposed on UK financial regulators would make for “a really exciting few years ahead”.
“We’ve got a vibrant, diverse financial sector in the UK,” he said. “But our job now is to think about what further steps… we can do to further enhance competition, competitiveness and broader growth.”
Among a slew of new post-Brexit responsibilities handed to regulators under the Financial Services and Markets Act 2023, the government introduced a statutory mandate for financial watchdogs to facilitate the UK economy’s international competitiveness and growth.
This “secondary objective” given to the Financial Conduct Authority (FCA) and BoE’s Prudential Regulation Authority (PRA) has become a key fixture of debates over certain measures, including Basel 3.1 capital rules to shock-proof banks and overhauling the EU’s Solvency II insurance reforms.
“It’s definitely had an impact on our policy-making,” Bailey said, adding that the new mandate was taken “into strong consideration” for the latest Basel changes.
Earlier this month, the BoE unveiled “substantial amendments” to its package that meant major banks would not have to set aside as much cash for capital buffers as previously planned. The rules were also delayed by six months to 1 January 2026.
Bailey, who represents the PRA on the Basel Committee for Banking Supervision, singled out changes to capital requirements around small business and infrastructure lending as examples of the regulator being “mindful of the impact on competitiveness and growth”.
The BoE’s initial plans would have required lenders to hold more capital against loans to small firms, which many in the industry argued could have damaged the sector and broader economy. The updated proposals said there would be no increase in capital requirements.
“We’ve got a long road to implementation ahead of us, but so far the feedback that we’ve had has been broadly welcoming, not just from the banks but the broader set of stakeholders with which we engaged,” Bailey said.
“I think people can see that we have made a big effort to ensure we’ve got the right level of resilience in the banking sector, and that means making sure that capital requirements appropriately reflect the risk.”
‘We’re watching what’s going on in the US’
The Basel 3.1 framework was introduced in 2017 by a group of central banks from 28 countries as part of efforts to make banks safer following the financial crisis.
The BoE announced its changes just days after the US Federal Reserve, considered a trendsetter among Western central banks, announced it would halve the capital increase faced by the biggest Wall Street banks after some threatened lawsuits over the rules.
Bailey argued that the secondary objective also being subject to alignment with international standards “sometimes gets overlooked” by external stakeholders but meant the PRA had “kept an eye on what’s going on in other jurisdictions”.
He said that while the decision to delay implementation was partly due to May’s general election announcement forcing regulators into a “quiet period”, it also “had regard to” the EU delaying parts of its Basel rules that deal with banks’ trading businesses to the same date.
“There is some healthy consistency there in terms of firms that do business in both jurisdictions being able to implement the changes at the same time,” Bailey said.
“And yes, we’re watching what’s going on in the US,” he added, noting that recent comments from the Fed had given “some very helpful clarity on the direction of travel”.
‘Strong and simple’
Alongside its Basel 3.1 statement, the BoE also published a set of proposals to simplify capital rules for so-called small domestic deposit takers with simpler business models and under £20bn in assets.
Part of a wider “strong and simple framework”, the BoE is trying to strip out complexity for non-systemic banks and building societies that have previously operated under the same regime as the biggest lenders.
“They innovate, they provide opportunities for growth, and in many cases they provide financial services to sectors, or geographies, communities that might not otherwise have access to financial services,” Bailey said.
“The cost of understanding, doing the calculations and applying those regulations can be disproportionately high for those smaller firms, and it can get in the way of them growing.”
He said the “biggest change” had been to remove the three separate capital buffers firms must hold and replace them with a single one that is firm-specific and informed by stress-testing.
“Smaller firms typically have less access to markets to raise new capital than larger firms,” Bailey said, adding the the BoE’s analysis suggests they are often “more prudent” in holding so-called management buffers above regulatory capital requirements.
He added that by giving these firms more consistency and predictability, they might “feel incentivised” to use more of their management buffers “to grow their businesses and support their customers”.
Around 80 firms are eligible to opt in for the regime, with 30 doing so before the capital elements were announced.
“It’s not designed to lower standards in any way,” Bailey insisted. “We think that resilience is a really important factor that underpins competitiveness.
“No one wants to come and do business in a jurisdiction if you’re not confident that it will be resilient, if you think there’s a high likelihood of a crisis.”
Although eligible firms only account for around three per cent of UK lending, Bailey said the framework could influence wider policy.
“We’ll think about, going forward, if there are lessons that we can learn from that regime that we can apply to other firms that don’t qualify for that regime,” he said.
“There’s a lot of interest among our regulatory peers in other jurisdictions to understand and learn what we’re doing.”