Bank of England calls for more lenient capital standards for smaller banks

The UK's central bank made the case for a "differentiated" approach in its response to a European Commission consultation on the implementation of the revised Capital Requirements Directive (CRD IV), according to a letter from Prudential Regulation Authority (PRA) chief executive Andrew Bailey to the UK Treasury.

In his letter, Bailey said that the PRA favoured a "more proportionate approach" that "could help foster greater competition without any material negative impact on financial stability".

"The EU, unlike a number of other large jurisdictions, applies broadly the same set of rules to all its 'credit institutions'," he said.

"The goal of this approach is to deliver safety and soundness in the financial system, achieve a level playing field and thus help complete the Single Market. But this 'one size fits all' approach of common binding rules that doesn't differentiate by the size or complexity of an institution leads to a high cost of regulation for smaller firms which can cause market distortions. The Bank's view is that policy makers need to weigh the desirability of a single rule book for all firms with wider objectives, including growth, financial stability and effective competition," he said.

Bailey suggested that rules around the so-called Net Stable Funding Ratio liquidity requirement and reporting requirements could be adjusted by the Commission to apply in a more proportionate manner. He also suggested that the Commission should "narrow the gap" between capital requirements set by a bank's use of its own internal model and by the regulator's "standardised" approach, which tended to be relied upon by smaller institutions.

CRD IV will implement the Basel III international banking regulatory reform package, including new baseline requirements for capital, leverage and liquidity. Most of the new requirements are due to come into force by 2019. The rules allow banks to use either their own 'internal' models to weigh up various risks and calculate the amount of capital that they must hold, or a standardised model, which can require them to hold more capital against the same type of asset.

The PRA intends to look at whether any changes can be made to the UK's application process for banks wishing to use an internal model as part of its first annual competition report, according to Bailey's letter. It also intends to run a series of seminars for smaller banks aimed at ensuring they have "a clear understanding of the necessary modelling standards that we expect them to meet", he said.