Sue the BOE? City Minister Surprises Bankers With a New Idea

A UK government minister has suggested banks could sue the Bank of England over new rules that will force them to hold more capital for customer loans, potentially increasing borrowing costs for small businesses.

(Bloomberg) — A UK government minister has suggested banks could sue the Bank of England over new rules that will force them to hold more capital for customer loans, potentially increasing borrowing costs for small businesses. 

Andrew Griffith, the City minister, raised the prospect of legal action during meetings with firms worried about how Britain will interpret the global Basel reforms, according to people familiar with the matter who didn’t want to be named discussing private talks.

There is widespread unhappiness among medium-sized banks over the rules that come into force from January 2025. The Basel 3.1 reforms, set by the Basel Committee on Banking Supervision but implemented by local regulators, are intended to make banks’ risk assessment more detailed and consistent. It’s the latest overhaul of the financial system after the 2008 crisis, but the first time the UK has implemented changes outside the European Union. 

Critics believe the version proposed by the BOE’s Prudential Regulation Authority will shrink lending to smaller businesses and put the UK at a disadvantage with the EU, which is adopting a lighter touch. 

Griffith, who is spearheading the UK government’s push to boost the financial services sector following Brexit, triggered surprise with his suggestion of legal action, according to people familiar with the conversations. Many bankers believe it would be not viable, given the regulated nature of the industry.

A person familiar with the Treasury’s thinking, who asked not to be named discussing a private matter, said the minister recognized the PRA’s role as an independent regulator with responsibility for aligning the UK with international standards.

A Treasury spokesperson declined to comment on Griffith’s behalf.

These tensions follow a year of clashes between the government and the BOE over post-Brexit reforms. The Treasury eventually dropped plans to introduce a power for ministers to intervene in regulators’ decisions from its Financial Services and Markets Bill in an attempt to soothe relations.

Small Businesses 

The PRA published its Basel 3.1 plans in November, with a consultation running until March 31. The proposals will not “significantly increase capital requirements,” Phil Evans, the PRA’s prudential policy director, said in a speech in December.

The changes will release capital in some areas — such as mainstream mortgages —  but could lead to significantly increased levels in others including loans to landlords and green finance, according to several bank executives who spoke to Bloomberg News. 

Smaller banks are likely to be hit harder than bigger ones, which can use their own risk models to reduce the capital burden. Loans by those mid-tier banks to small businesses may attract some of the biggest increases in capital requirements. 

“We are really concerned that these proposals will increase SME capital requirements by more than 30%, driving up the cost of lending for SMEs,” according to Richard Davies, chief executive officer of Allica Bank. 

Such a tightening would be a setback for the UK, according to Mark Mullen, chief executive officer of Atom Bank. “SMEs are massively important to the economic future of the country in virtually every way,” Mullen said. It could also affect competition among banks. “The growth in lending by challenger banks to SMEs in the past eight to ten years has been a real success story,” Mullen said.

Small lenders have also long held frustrations about the UK’s standards on loss-absorbing capital known as MREL, or minimum requirement for own funds and eligible liabilities, which are tougher than in the EU and US.

Brexit Freedom

While Evans in December heralded the PRA’s role in ensuring the UK is a “safe and stable place to do business,” several industry executives have privately said the regulator was using its Brexit freedoms to raise the regulatory bar, rather than to pursue deregulation that could boost growth. Insurers had a similar experience over changes to the Solvency II capital rules. 

Andrew Bailey, BOE governor, has also defended the UK’s approach to Basel, saying the route the EU is taking is “non compliant” with the global benchmark — a view shared in some respects by the Basel Committee, though there are no formal consequences for failing to comply.

Several banks are raising their concerns in response to the PRA consultation, according to some of the people involved. Some are considering whether to make the case that the watchdog is going against its new duty to consider international competitiveness, as required by the government’s incoming Financial Services and Markets Bill. 

Read More: Why London’s Brexit ‘Big Bang’ Won’t Be Such a Blast: QuickTake

Even among the banking critics, there is an acceptance that the BOE is ultimately acting in line with its main mandate to secure financial stability. If the government wants to promote its stated agenda of economic growth, they hope ministers might still be persuaded to step in. 

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