UK Banks Warn Watchdog Against Being First on New Capital Rule

British lenders are warning regulators not to get ahead of other countries with their first big set of rule changes following Brexit and the recent banking collapses.

(Bloomberg) — British lenders are warning regulators not to get ahead of other countries with their first big set of rule changes following Brexit and the recent banking collapses. 

Banks are asking for more time to adopt Basel 3.1 capital reforms if there are delays to the process in the US and European Union, so that large lenders do not have to contend with different regimes, according to a document published by trade body UK Finance on Friday.

All three jurisdictions have said they will implement the guidelines, agreed upon in 2017 and postponed several times, from January 2025. However, the US is yet to publish its Basel 3 plans and the EU’s timetable could also slip, according to industry figures who contributed to UK Finance’s paper. 

UK banks also want the Prudential Regulation Authority to join the EU in keeping favorable capital treatment of SME loans, known as the supporting factor, according to UK Finance’s submission to the watchdog. They’d also like the PRA to drop plans to make lenders attach more capital to business loans backed by collateral than to some unsecured loans. 

Simon Hills, director of prudential policy at UK Finance, said there was a “strong consensus” among banks of different sizes over how the PRA’s policies should be changed. “It is important for access to finance as well as for the UK being seen to uphold strong prudential standards that we get the implementation of Basel 3.1 right,” Hills said in an interview.

UK officials are also concerned about how far the country takes the Basel reforms relative to other jurisdictions. They have raised the issue with EU counterparts and see a risk of UK banks being disadvantaged by the bloc’s current approach, according to one person familiar with the matter, who asked not to be named in order to speak about internal discussions. 

The PRA, part of the Bank of England that oversees the safety of the financial system, is in charge of implementing the UK’s version of the reforms set by the Basel Committee on Banking Supervision. Basel 3.1 is due to finalize the capital reforms proposed after the 2008 financial crisis, and will mark the first time the UK has implemented its own major set of rules outside the EU.

Policymakers are considering the changes at a time of heightened anxiety around banking rules, following the failure of Silicon Valley Bank and Signature Bank in the US and the emergency deal to sell Credit Suisse Group AG. US President Joe Biden’s administration is pressing regulators to reinstate tighter rules for mid-sized banks.

There are divided views about whether the PRA will heed the banks’ calls for moderation. Some industry figures, who asked not to be named discussing policy matters, are optimistic on the grounds that otherwise UK banks might be less attractive than their international peers. That could impede growth and lead to criticism of the PRA, which must consider the country’s competitiveness under forthcoming legislation, they said. 

But others are more resigned, believing that the regulator will seek to tighten rules after the banking turmoil, furthering its position that international competitiveness is enhanced by having a robust regime.

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The banking failures have also sparked debates around the world about whether state guarantees for deposits, expanded by the US authorities when SVB failed, should be increased or even made universal. There has also been a focus on liquidity, given bank runs have worsened the recent downwards spirals. 

Sam Woods, the PRA’s chief executive, told a parliamentary committee last week that banks may have to hold more cash to meet depositors’ rapid withdrawal demands that can now happen electronically. Changing the liquidity coverage ratio — the measure of how much of customers’ deposits must be held by the bank in cash — could have wide-ranging effects, such as stoking demand for retail deposits and prompting banks to store far more cash with the central bank, for which the government pays interest. 

John Cronin, an analyst at Goodbody Securities, said a significant review of the liquidity rules is “very unlikely.” The PRA could “do a full review to assess the impact on the system” before going ahead, Cronin said in an interview.

The PRA did not respond immediately to a request for comment.

–With assistance from Alex Wickham.

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