The Bank of England (BoE) is pressing hard for the relaxation of sovereign capital norms for small banks with the Basel Committee on Banking Supervision (BCBS), amid concerns that smaller banks won’t get a level-playing field as compared to bigger rivals.
The BoE’s Prudential Regulation Authority (PRA) officials are lobbying with BCBS to reduce the standardized risk weights used to calculate how much capital needs to be set aside for individual loans, as reported by The Financial Times.
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The BoE argued that small lenders generally use standardized risk-weights, instead of the bespoke internal models that large firms use, to calculate their capital requirements. This requires them to stash more capital when they lend, subsequently forcing them to charge more from customers.
The PRA’s head of banks, building societies, and credit unions, Martin Stewart, was quoted by The Financial Times as saying that the current risk weights for small banks were too conservative.
"There is clearly a strong body of evidence that there should be some change," Stewart told the publication.
"We have taken it to the latest round of Basel negotiations that there should be an alternative," he further added.
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By GlobalDataThe UK’s lobbying effort was first reported by The Telegraph.
In 2013, the British financial regulator agreed to remove the hurdles for new banks by enabling them to operate with common equity tier one capital of only 4.5% of their risk-adjusted assets, against 7% under the normal rule.
