BoE cuts bank capital requirements to boost business and household lending

The Bank of England (BoE) has reduced the capital requirement for UK banks for the first time since the 2008 financial crisis. The move comes as part of the UK authorities’ measures to ease regulations set in place to protect the economy from total collapse.

The United Kingdom has reduced the capital needed by UK lenders as part of ongoing measures to loosen regulations that protect the economy from total collapse. The UK’s central bank, the Bank of England (BoE), announced that the new capital requirements for the country’s banking institutions will reduce from 14% to 13% on risk-weighted assets. 

The reduced rate will now allow the banks to set aside a lower amount in reserve. The regulations were established to regulate excessive risk-taking through bank lending and investments following the 2008 financial crisis, which weakened the UK economy. 

BoE cuts bank capital requirements to boost business and household lending

Member of the House of Lords of the United Kingdom, Prem Sikka, wrote on Sunday that British banks would anticipate eased capital requirements to allow banks to increase leverage.

Capital requirements serve as a cushion for the economy against risky lending and investments on bank balance sheets. The new regulations were championed by the BoE’s Financial Policy Committee (FPC), chaired by its governor Andrew Bailey, after banks called for lessened regulations.

BoE is set to enforce the policy from 2027 to make lending accessible to both enterprises and households. FPC stated that the new policies will enable banks to lend funds with certainty and confidence. The committee’s review, upon close inspection, found that UK banking institutions have maintained a relatively low risk on their balance sheets since early 2015. 

The institutions have also maintained reserves above the minimum funds required of them by law. The decision aligned with the UK’s “evolving financial system,” as the committee had first assessed capital demands a decade ago. 

According to an official publication from the Bank of England, the FPC also considered three options to enhance the effectiveness of the capital framework. First, the Bank highlighted that it will work toward ensuring the usability of regulatory buffers to reduce incentives that mandate banks to hold more capital than what regulations demand. 

Secondly, the FPC stated that it will review the implementation of leverage in the UK to ensure it functions as intended. Lastly, the FPC will support the Bank’s initiatives in responding to feedback on the capital framework.

The regulators supported the policy to reduce bank capital requirements, stating that the country’s largest banks could support sustainable growth in the real economy and had developed the resilience to deal with harsh economic environments. These banks include NatWest, Santander UK, Standard Chartered, Barclays, Lloyds Banking Group, and Nationwide.

Chancellor Rachael Reeves welcomes a review of bank capital demands

Last week, Chancellor Rachel Reeves urged the BoE to take necessary actions to curb the slow economic growth and channel more funds into companies with high growth potential. She emphasized that the rules were a “boot on the neck” of enterprises and risked decapitating innovation in the country. 

She also called for a review of bank capital demands in a letter to the BoE Governor, saying that the review should ensure an optimal balance between delivery resilience, growth, and competitiveness.

Cryptopolitan reported in mid-November that the Office for National Statistics revealed the UK’s economy grew by a meagre 0.1%, falling short of what analysts and experts had anticipated. Analysts polled by Reuters had anticipated a 0.2% economic growth following the 0.3% growth recorded in the second quarter. 

The slow growth rate has mounted increasing pressure to kickstart the seemingly stalling economy. Reeves spared banks from a tax rise in her controversial budget to expand the UK’s presence and help boost the economy. Following the budget announcement, Goldman Sachs stated that it would expand its Birmingham office by hiring 500 new staff members.

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