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The Bank of England has introduced new rules designed to ease lending for small businesses and mortgage funding, marking a significant shift in regulatory policy. Following this announcement, shares in major banks including Lloyds Banking Group PLC (LSE:LLOY), Barclays, Natwest, and HSBC saw increases of more than 1%.
These changes come after years of debate over the regulatory framework established by Basel III, which was developed in response to the 2008 financial crisis to enhance bank stability. The new amendments to Basel III guidelines, overseen by the Bank for International Settlements (BIS), will reduce the restrictions on lending to small and medium-sized enterprises (SMEs) and infrastructure projects. Additionally, banks will have more flexibility in mortgage lending due to revised property valuation methods.
Under the original Basel III provisions, banks were required to set aside more capital to lend to these sectors. The updated rules, however, will have a minimal impact on Tier 1 capital requirements, with changes accounting for less than 1% in aggregate across major banks. These adjustments will be phased in over four years, starting in 2026, which is a delay from the previous July 2025 start date.
Phil Evans, the Bank of England’s director of prudential policy, noted that the capital impact of the new rules would be very small compared to previous increases required from the global financial crisis to the COVID-19 pandemic. Evans also highlighted that the impact would be smaller than in other major jurisdictions.
Chancellor Rachel Reeves welcomed the reforms, emphasizing their importance in supporting business growth, infrastructure development, and personal finances. She described the changes as marking “the end of a long road after the 2008 financial crisis.”
The U.S. has also announced a scaling back of Basel III proposals following strong objections from its major banks, and the European Union has postponed new proprietary trading regulations until January 2026. Steven Hall, a partner in KPMG UK's Risk and Regulatory Advisory practice, expressed concerns that further changes to the proposals might occur, potentially causing additional delays. Hall highlighted the industry's frustration over the protracted timeline to finalize these reforms, which have been under discussion for nearly 15 years.
