UK’s banking regulator ‘extremely mindful’ of US on capital rules overhaul

The UK’s banking regulator is “extremely mindful” of pushing ahead with a sweeping set of capital rule changes while the US’s reform package remains up in the air, its chief executive has said.

Sam Woods, the deputy governor of the Bank of England and boss of the Prudential Regulation Authority, told the Following the Rules podcast that the watchdog was reassessing its timelines for the reforms due to a lack of clarity in the US.

Basel III, known as Basel 3.1 in the UK, was a package of rules drawn up in the wake of the financial crisis to shore up lenders to financial shocks. Under the latest changes to the rules, banks globally are expected to face a hike of 16 per cent in the amount of capital they hold.

However, the plans have drawn criticism on both sides of the Atlantic. US lenders have threatened to sue the Federal Reserve and the Federal Deposit Insurance Corporation over the planned reforms. The backlash has delayed any roll out and jurisdictions outside the US have now been forced to kick back their own plans.

While Woods would not confirm that the PRA had delayed its timeline, he said it was “extremely mindful of what’s happening in other jurisdictions”. 

“Obviously in the US at the moment, the implementation date is unclear. At the point that we chose our current implementation date, the 1st of July 25, it appeared the US would go at that time as well,” he said. 

“And in the meantime, the EU has evolved its position, and it’s doing part of the package on the 1st of January coming up next year. But it’s announced that it will delay the market bits of the package until a year later, so that’s a moving piece as well.

“We’re considering that all very carefully. We’ve had strong representations from industry, including over the summer, about the date and about the fact that we are now obviously within one year of the date that we have previously stated.”

Woods was speaking two days before Bloomberg reported last week that the regulator is planning to kick back the implementation of the rules until January 2026 at the earliest to give it time to monitor international developments.

The delays will extend the roll out nearly four years beyond their original planned implementation date. Regulators drew up the rules in 2017 with plans to introduce them in 2022, but that was stretched by the pandemic.

Rishi Sunak’s move to call a snap election delayed the package even further this year. A formal update on the proposals and timelines is now expected from the PRA on the 12 September.

Described as Basel III ‘endgame’, the changes will “significantly impact business models, compelling banks to reconsider their capital allocation strategies”, PwC warned last year. 

Woods said the impact of the rules was likely to be felt differently in the UK compared to other jurisdictions, with the level of capital requirements for UK lenders expected “to be about flat as we go through this package”. 

“The objective is a different one, which is to iron out the really unacceptable level of variability that we have across different banks in terms of the capital requirements that they have for similar or sometimes the same assets,” he said.

“And that’s not just a UK problem. It’s a global problem. And this so-called Basel 3.1 package is designed to iron that out. Now, as all these things, a few other things get added in, but that’s really the point of the package.”