Britain's Largest Banks Will Press the Chancellor to Cut Capital Requirements, Treasury Committee Chair Says

What this means

Lower capital requirements let banks expand credit on the same equity base. The effect matches a rate cut transmitted through the banking system, at a time when the Bank of England is trying to contain inflation. British bank shareholders gain through higher returns on equity. Depositors and taxpayers carry more tail risk, meaning the chance of rare but severe losses. Holders of long-dated gilts, the British government bonds, face the prospect of more credit-funded demand. Viewed from a sound-money perspective, regulators competing to lower capital standards is how credit booms start. The consensus treats it as a competitiveness question. Precedents exist. The 2018 US law that raised regulatory thresholds for mid-sized banks was followed by the failure of Silicon Valley Bank in 2023. Britain's light-touch regulation before 2008 was followed by the collapse of Royal Bank of Scotland and HBOS. The likelier outcome over the next several months is smaller technical changes, such as lower mortgage risk weights (the capital charged against each loan) or adjusted buffers, rather than a headline cut to core ratios, because the Prudential Regulation Authority controls the decision. A Treasury instruction that overrides the regulator would prove this wrong and would undermine confidence in the Bank of England's independence.