UK’s Smaller Banks Could Benefit From New Capital Rules

New capital requirements could help Great Britain’s smaller lenders compete in the country’s mortgage market.

That’s according to a report published by Reuters on Thursday (Sept. 12), the same day the Bank of England said it would scale back its capital rules.

The goal here, the report said, is to make the banking sector more able to withstand shocks while bolstering its competitiveness. Smaller banks stand to benefit from this change, Reuters added, citing interviews with sources and industry analysts.

According to Reuters, smaller banks in the U.K. have been advocating for rule changes that would permit greater use of internal models to calculate loan risk, rather than standard models which can be more severe.

“The package will boost competition among U.K. banks, by broadening access to the more favorable internal ratings-based approach and giving small domestic deposit takers interim relief from the new rules,” said Tom Callaby, a financial services partner with law firm CMS.

The report noted that few smaller banks haven’t made much progress in mortgage lending, bogged down by rising tech, compliance and labor costs. This has strengthened calls for these banks to merge with stronger lenders.

However, the central bank’s new changes are likely to ease some of the pressures facing smaller banks, Reuters said, allowing them to build their own market share.

“This is not about weakening the capital requirements on smaller banks, but there are some reporting requirements that are simply less relevant for them, and some of those have been dialed down,” Michelle Adcock, a director in KPMG’s Regulatory Insight Centre, told Reuters.

Meanwhile, PYMNTS recently examined changes to capital requirements for banks in America, which are facing a 9% boost, lower than the 19% initially planned by regulators.

This proposal means that the “largest, most complex firms should be subject to the most stringent requirements, in light of the costs that their potential failure would impose on the broader financial system and thus on businesses and households,” Federal Reserve Vice Chair Michael Barr said in a speech this week.

While the financial world figures out where to go from here, PYMNTS wrote, “banks may scale back lending in the face of uncertainty, preserving capital ahead of time, so to speak.”

This could hurt small businesses, which have already seen borrowing become tougher. The PYMNTS Intelligence report “One-Quarter of SMBs Plan to Increase Corporate Card Usage This Year” showed that 47% of small- to medium-sized businesses with annual revenues of $10 million or less had access to business or personal financing.