In a move that could eventually lead to easier access to credit for consumers and companies, the Bank of England has signaled a relaxation of strict banking capital rules. By lowering the mandatory financial cushion that banks must hold, the regulator hopes to release more funds into the economy. The theory is simple: if banks are required to hoard less cash, they have more available to lend out in the form of mortgages and business loans.
The central bank confirmed that capital requirements related to risk-weighted assets would drop by roughly one percentage point. This change follows a review process that began earlier in the year and reflects the sector’s ability to weather recent macroeconomic shocks, including the pandemic and the war in Ukraine. The top seven UK banks have all passed recent “stress tests,” proving they have the financial fortitude to survive a serious economic downturn.
Chancellor Rachel Reeves has likely welcomed the news, having previously urged regulators to prioritize growth and competitiveness. In correspondence with Governor Andrew Bailey, she emphasized the need for a framework that balances resilience with the ability to expand the economy. This policy shift appears to be a direct response to the government’s push to get the UK economy moving again.
However, the benefits for borrowers are not guaranteed. There are no explicit rules dictating how banks must use the capital released by these rule changes. Bank bosses could theoretically choose to use the financial leeway to pay out higher dividends to shareholders rather than issuing more loans. Governor Bailey has urged banks to take the long view, noting that supporting the economy through lending ultimately benefits the banks themselves.
The backdrop to this decision is a financial landscape that is evolving rapidly. While trying to stimulate traditional lending, the Bank is also keeping a wary eye on the booming tech sector. High debt levels among AI companies and the interconnectivity between tech firms and credit markets have been flagged as areas requiring close monitoring to prevent future instability.