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UK Considering Easing Small Bank Capital Rules, Minister Says

The Canary Wharf financial, business and shopping district in London. (Chris Ratcliffe/Bloomberg)

(Bloomberg) -- The UK government is working with the Bank of England on proposals to relax regulations for smaller banks and allow them to offer billions of pounds in extra lending to support economic growth.

City Minister Emma Reynolds told the House of Lords Financial Services Regulation Committee on Wednesday that the topic was a “live issue” and the Treasury was “engaging very closely with the Bank on this and they are considering feedback that they have had on it.”

The government, the Financial Conduct Authority and the BOE’s Prudential Regulation Authority are reviewing the wider regulatory landscape to foster more growth and competition, while also protecting consumers. The Treasury wants to shift the balance by slashing red tape.

Smaller lenders are calling on regulators to seize the moment to water down the rules on MREL, or Minimum Requirement for Own Funds and Eligible Liabilities. MREL was introduced about a decade ago to ensure failing banks could be recapitalized without taxpayer help. Banks must set out which assets would bear losses in this scenario, for example equity and bail-in bonds. 

The requirements, which the industry says goes much further than US and the European Union, are a particular burden for small and medium sized lenders that have long wanted to make more firms exempt. They say the change could unlock billions of pounds of lending power.

However, the BOE is concerned about failures like the 2023 collapse of Silicon Valley Bank UK. It proposed amendments to the rules last year and a consultation with the industry concluded last month. The BOE has suggested the MREL threshold to be raised from £15bn-£25bn to £20bn-£30bn. The industry has proposed £40bn-£50bn. The BOE is reviewing responses to its consultation but declined to comment.

Michael Forsyth, chair of the Lords committee and a former chair of Secure Trust Bank, said the MREL rules “are trapping capital that would otherwise be in the economy” and preventing small property firms from accessing funds needed to support the government’s housebuilding goals. 

“I take your point about trapping capital,” Reynolds said. “And we do want to see this target of 1.5 million homes.”

Investing Culture

Reynolds, who became a Treasury minister in January after Tulip Siddiq’s resignation, also promised to deliver a “cultural change” at Britain’s financial regulators that would move them “away from risk elimination to a system that encourages informed and responsible risk taking.” In an apparent reference to the US, where President Donald Trump has pledged to deregulate, she added she was “aware we face this global competition.”

Reynolds said regulators’ excessive caution has backfired and is even causing its own version of consumer harm. She pointed to the £300 billion held in cash ISAs, a tax efficient savings account, that might otherwise be invested in the stock market. At a time of high inflation, that meant households have effectively lost a fortune.

“We have failed to drive an investment culture that allows people to invest their money,” she said. “That is part of consumer protection, we have regulated so much that we are not protecting consumers against inflation.”

“I feel like we’ve regulated into zero risk – and that’s bad for consumers as well as bad for firms,” she added. 

Legislators in the Lords warned Reynolds that the government’s plans may fail if politicians do not give regulators clear direction. FCA chief executive Nikhil Rathi has asked politicians to provide a “metric for tolerable failure” that reassures regulators that they will not be held solely responsible.

“I am cautious about this because I don’t know how we put numbers on that,” Reynolds said. “I know the broader point the chief executive is trying to make and I do take the point about who carries the can. I’m painfully aware of that. That is something we are thinking about.”

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