Banks have been given a three-year timeline to prepare for a new regulatory environment. The Bank of England announced on Tuesday that new capital rules, which will lower the reserve requirements for lenders, are due to come into force in 2027. This long lead time is designed to allow the sector to adjust gradually to the new framework, which aims to release capital for investment in the real economy.
The central bank had announced a review of these levels back in June, following assessments in 2015 and 2019. The conclusion of this review is that the banking sector has matured and strengthened significantly. Despite facing “several macroeconomic shocks” in recent years, banks have continued to issue loans and mortgages, proving that the current capital levels are perhaps excessively high.
Sarah Breeden, the Bank’s deputy governor for financial stability, framed the changes as an “evolution” of the post-crisis system. However, she drew a line in the sand, stating that barring major changes, “it would be unwise to reduce our benchmark further.” This suggests that the 2027 adjustment represents the floor for deregulation, and banks should not expect further easing.
The changes are arriving in a complex political and economic climate. Banks have recently emerged as “winners” from the government budget, narrowly escaping higher taxes. Now, with regulations loosening, there will be intense public and political pressure for them to utilize this windfall to support UK businesses and homebuyers, rather than hoarding the cash.
As the 2027 date approaches, the focus will shift to how banks allocate this capital. Governor Andrew Bailey has emphasized that it is not for the regulator to dictate business models, but the expectation is clear. The success of this policy will be judged on whether it actually results in the promised economic growth or merely improves bank balance sheets.