Bank of England unveils shake up of financial crisis banking rules
The Bank of England has unveiled a sweeping package of reforms aimed at easing the regulatory burden on smaller and mid-sized banks, marking a major shakeup of the post-financial crisis rulebook.
The central bank’s changes include a one-year delay to key parts of the Basel 3.1 reforms – the UK’s version of international banking rules developed in the wake of the 2008 global crisis – and a series of adjustments to capital requirements that will benefit smaller lenders.
The bulk of the Basel 3.1 regime will still take effect in January 2027, as planned. Still, the Bank has pushed back the introduction of the trading book rules — which impact investment banks’ capital requirements for market risk — to January 2028.
The delay aligns the UK with recent moves by the EU. It comes amid continued uncertainty in the US after President Donald Trump’s administration diluted reforms in the White House’s rollout of the “Basel Endgame.”
The central bank said the delay would “allow time for greater clarity to emerge in other jurisdictions” while giving UK firms time to prepare.
Mid-sized banks to reach higher on growth
The bank unveiled changes to the thresholds for the minimum requirement for own funds and eligible liabilities (MREL), which follows a consultation in the final quarter of 2024.
Introduced in the fallout of the 2008 financial crisis, MREL rules dictate strict tailored requirements for banks possessing assets between £15-25bn and act as a regulatory buffer to ensure lenders can be safely resolved in a crisis without taxpayer bailouts.
The legislation has acted as a major headache for mid-sized lenders, with FTSE 250 listed Paragon Banking Group telling the Financial Services Regulation Committee: “MREL is a significant barrier to growth and competition of mid-tier specialist banks”.
The bank raised the threshold to £25-40bn, an increase from the £20-30bn originally floated in the consultation.
RBC analyst Benjamin Toms projected Metro and OSB would save around 20 per cent and 11 per cent of profit before tax for 2027 if the threshold was hiked to £30-40bn.
Mortgage boost for smaller banks
The bank’s Prudential Regulation Authority (PRA) will issue a discussion paper in the summer to outline how to reduce the barriers for mid-sized banks to compete in the mortgage market.
Traditionally, larger banks have held an advantage due to possessing sophisticated internal computer models, known as internal ratings based (IRB) models, that can assess the risk of their mortgage loans.
The models provide a clearer level of risk, allowing banks to hold less safety buffer capital and thus freeing up more money to lend.
Mid-size lenders struggle to access IRB models due to the heightened cost and vast amounts of historical data on mortgage defaults, losses, and recoveries required, leaving them at a disadvantaged spot in the market.
The PRA discussion paper aims to “help mid-sized banks to grow by adjusting some barriers to gaining permissions”.
Eyes on Reeves’ reforms
The moves come as the bank works towards a “strong and simple framework” pledging a streamlined regulatory regime for banks and building societies.
“Today’s announcements will give certainty to firms of all sizes about the future capital framework,” Sam Woods, chief executive of the Prudential Regulation Authority, said.
He added the changes would “bring in a simpler regime for smaller banks, make it easier for mid-sized banks to scale up in the mortgage market, and allow an extra year for part of the implementation of new investment banking rules.”
Nigel Terrington, chief executive of Paragon, welcomed the changes as a “strong step in harnessing the full potential of this sector, removing a significant barrier to growth and helping to deliver greater choice and competition for consumers”.
Chancellor Rachel Reeves will deliver her Mansion House address tonight, where she is expected to tout banks as a conduit for economic growth as she debuts the Treasury’s Financial Services Growth & Competitiveness Strategy.
The banking industry and wider financial services industry has looked to the speech for major reforms from the government amid its deregulation and economic growth push.
Reeves announced on Tuesday, as part of her ‘Leeds Reforms’, that City minister Emma Reynolds will “lead a review” looking at changes to ring-fencing.
The 15-year-old legislation, which forces banks to keep their retail and investment banking activities separate, has been opposed by top bosses who have lobbied the Chancellor to rip up the system.