A recent report by the Financial Times has revealed that a plan by the Bank of England (BoE) to introduce global banking reforms is facing a six-month delay. Despite the adjustment, the BoE has assured that it will make up for the lost half-year by ushering in a shorter phase-in period.
Basel Committee on Banking Supervision
These impending reforms carry significant implications, particularly for SME lending, infrastructure financing, and green initiatives in the UK. The discussion surrounding these reforms has prompted major UK lenders to voice their concerns over the potential repercussions of overly strict adherence to the rules.
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Notably, Dame Alison Rose, the chief financial officer and outgoing chairman of NatWest, recently raised concerns that strict adherence to stricter international capital standards could jeopardise the competitive position of UK banks, as reported by Reuters.
While NatWest’s stance may not come as a surprise, it is likely to resonate across the entire UK banking sector, which is actively advocating for a more lenient approach to these proposed reforms.
The BoE faces a complex challenge, as it endeavours to strike a delicate balance. On one hand, it is tasked with the mission of enhancing the international competitiveness and growth of the UK’s financial sector. On the other hand, it seeks to align with globally recognised regulatory standards, navigating a precarious path to meet these dual objectives.
The roots of this call for regulatory reform can be traced back to the aftermath of the 2007-2009 financial crisis, during which the Basel Committee on Banking Supervision established the minimum reserves that banks must maintain as a safeguard against losses.
The Bank of England’s assessment indicates that by the end of the decade, banks may see an approximate 6% increase in capital requirements, with the rules from the global Basel III norms now slated for implementation from July 2025.
Importantly, the flexibility offered by Brexit allows the UK to shape its own financial regulations, which suggests the 6% figure is a reflection of the regulatory measures deemed by the BoE to be essential and manageable by the banking community.
SME supporting factor
Furthermore, the BoE has proposed discontinuing the preferential capital treatment for loans to small businesses, commonly referred to as the SME supporting factor, which serves as an incentive for SME lending.
Research commissioned by Allica has indicated that these proposed changes could lead to a substantial £44 billion reduction in SME lending.
Innovate Finance, a UK fintech industry group, has further highlighted the regulatory measures’ potential to undermine SME financing precisely at a crucial juncture. As interest rates soar and unemployment rates rise, the BoE’s rules risk exacerbating the challenges facing small and medium-sized enterprises, casting a shadow over their ability to access vital financial support.
