Bank of England Signals Major Shift, Slashes Capital Rules to Boost Growth

Bank of England's Major Shift

The Bank of England (BoE), announced a substantial easing of its post-financial crisis regulations on Tuesday, cutting the amount of capital its lenders must hold. The adjustment, designed to encourage credit flow and directly boost economy growth, constitutes the first reduction in bank capital requirements since the 2008 global financial crisis.

The Bank of England confirmed that its comprehensive review of the capital framework determined that the required benchmark for Tier 1 capital should be lowered by one percentage point, moving from the 14% level established in 2015 down to 13% of risk-weighted assets. This move, a major shift, cutting capital buffers, reflects an evolving financial landscape.

Analysts described the changes enacted by the BoE as judicious yet significant. Executives and financiers had largely anticipated some relaxation of the rules. Such expectations were fueled by recent comments from officials at the central bank and preparatory moves by rival regulatory bodies, including those in the United States, to ease their own prudential standards.

In its biannual Financial Stability Report, the central bank additionally disclosed plans to launch a further assessment aimed at enhancing the usability of existing buffers and reviewing the implementation of the leverage ratio. These future initiatives could provide further regulatory relief for lenders. Shares in major institutions, including HSBC, Barclays, Lloyds Banking Group, and NatWest, climbed by 0.5% to 1.5%, surpassing the performance of the wider market. Coinciding with these announcements, the BoE also confirmed that the country's seven largest lenders successfully navigated its latest stress tests, affirming their resilience against severe macroeconomic and financial shocks.

Balancing Capital Costs and Economic Need

These actions represent the most decisive steps taken by British financial authorities to deliver on a commitment to bolster economic growth, a stated priority of the current Labour government. Following the 2008 crisis, banking regulators worldwide had raised capital standards to ensure the system possessed robust buffers to withstand market collapses. However, industry representatives have spent recent years arguing that these heightened reforms have fulfilled their goal.

The Bank of England justified the revision to its estimate of necessary bank capital by citing an updated assessment. This assessment weighs the benefits derived from higher capital protecting banks during crises against the negative macroeconomic impact of elevated capital costs hindering lending and thus overall economic expansion. Capital rules for growth are the key focus. The FPC has been reviewing potential adjustments to the capital structure since July.

The anticipated decrease in capital demands is partially linked to the upcoming implementation of global banking standards known as Basel 3.1, scheduled for 2027, as observed by analysts. Globally, the Trump administration in the United States is poised to ease capital regulations for its largest banks, while the European Union is working on proposals to streamline its regulatory framework.

The BoE clarified that the new 13% level is derived from an underlying optimal figure of 11%, augmented by two percentage points. This addition is intended to address outstanding deficiencies and shortcomings in the calculation of risk-weighted assets, the central bank explained. The FPC’s review of the leverage ratio, which compels banks to hold capital against total assets, will scrutinize its interaction with ring-fencing measures and assess whether its constraints have become disproportionate as banks undertake lower-risk exposures. Furthermore, the bank stated that it will detail plans later this week for a stress test focused on the resilience of the broader financial system, particularly within fast-growing private markets.

Bottom Line

The Bank of England's decision to lower the Tier 1 capital requirement benchmark to 13% is a clear policy shift aimed at increasing the capacity of major lenders to finance the economy. By reducing the capital buffer for the first time since the financial crisis, the BoE has aligned itself with global peers moving to balance financial resilience with the necessary impetus for economic growth and lending activity.