Bank of England plans to ease UK investment bank trading capital rules

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BoE eases bank capital rules

Highlights

Bank of England's Prudential Regulation Authority proposes relaxing investment bank trading capital rules, aligning with overseas markets and delaying full Basel III market risk framework implementation until January 2028.
The PRA's plan could lower capital requirements by about a third, approximately £700mn, for banks using internal models instead of the advanced standardised approach.
Regulatory adjustments respond to concerns that stricter rules may disadvantage UK banks versus global peers, with similar easing already underway in the U.S. and EU.

Proposal aligns trading rules with overseas markets

As reported by Financial Times, the Bank of England is planning to dilute capital rules covering investment banks’ trading activities after industry warnings that the Basel III market risk framework is too punitive.

The Prudential Regulation Authority says the proposals are intended to support international alignment and reflect concern that a surprisingly small number of banks had planned to use internal models to calculate market risk under the original version of the rules. The regulator had already said it is delaying implementation of key parts of the market risk framework until January 2028, while still planning to introduce the rest of the Basel rule book at the start of next year.

The proposed changes include lowering the capital required for thinly traded and hard-to-value securities and extending the monitoring period for how banks apply the rules. Sam Woods, deputy governor of the Bank of England and chief executive of the PRA, says the extra time allows the UK to take account of how the rules are being implemented elsewhere while ensuring bank trading activity remains appropriately capitalised.

Competitive pressure on UK wholesale markets

The PRA says some parts of the Basel framework may be more capital-intensive and operationally burdensome than originally intended, creating compliance and operating costs that are disproportionate to their prudential benefits. It warns that failing to address those issues could reduce the depth and liquidity of UK wholesale markets, weaken support for economic activity and leave UK-based banks at a competitive disadvantage against peers in other jurisdictions.

According to the regulator, 11 banks account for 95 per cent of the UK capital markets activity affected by the rules, and more than two-thirds of that business is conducted by UK subsidiaries of foreign banks, most of them major Wall Street firms. The PRA estimates that allowing banks to use internal models rather than the advanced standardised approach would cut capital requirements by about a third, or roughly £700mn.

The UK move follows similar action abroad. The U.S. Federal Reserve presented plans in March to revise its Basel Endgame reforms with adjustments aimed at producing a small decrease in capital requirements for Wall Street banks, while the European Commission says this year it will adopt legislation to neutralise for the next three years the impact of the trading-book reforms on investment banks’ market activities.

Our earlier report on European Commission banking reforms highlighted plans to give EU lenders more flexibility to move capital and liquidity across member states and to simplify rules that constrain lending. It also noted that Brussels was weighing targeted relief in parts of Basel III and other requirements to bolster the sector’s competitiveness while reopening debate on banking-union measures such as deposit insurance and crisis management.

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