Lenders call for overhaul of banking regulation

Some of the UK’s leading lenders have expressed their frustrations with UK banking regulation in a new report from the Association for Financial Markets in Europe (AFME). 

AFME welcomes the FPC’s move to lower its benchmark for Tier 1 capital requirements, which reflects both the effectiveness of postcrisis reforms and improvements in risk measurement. However, AFME cautions that a reduction in the benchmark alone will not be sufficient to deliver meaningful change in practice.

Under the existing framework, banks have limited scope to reduce their capital levels closer to the FPC’s benchmark due to binding constraints across the capital stack, including minimum requirements and buffers. As a result, AFME argues that structural changes to the framework are required if the benchmark is to be achievable in practice, reducing capital requirements in a way that is sufficiently meaningful to have a significant firm-level impact across business models. This is crucial because a narrow reform, underestimating areas of overcapitalisation for some business models, could introduce competitive distortions between firms undertaking similar economic activities.

AFME emphasises that there is already significant flexibility for the FPC and Prudential Regulation Authority (PRA) to act within the existing international framework. While supporting international engagement to review global standards, AFME encourages UK authorities not to delay reforms pending changes to Basel standards.

The submission sets out a range of recommendations aimed at reducing excessive structural conservatism while maintaining resilience. These include reforms to risk-weighted and leverage-based requirements, addressing overlaps in the treatment of domestic exposures, and simplifying the capital buffer framework to improve usability.

AFME highlights that a more proportionate and better-calibrated regime would enable banks to intermediate more efficiently across wholesale and capital markets, supporting lending, underwriting and market-making activity. In turn, this would help deepen market liquidity, reduce the cost of raising capital for UK companies, and strengthen the UK’s position as a conduit for global investment flows.

AFME and its members stand ready to support ongoing engagement with the FPC and the PRA as the review progresses.

Caroline Liesegang, Managing Director – Capital & Risk Management at AFME, said: “The FPC’s review is a crucial opportunity to modernise and future-proof the UK’s capital framework so it remains robust while better enabling banks to provide the lending, underwriting and market making activities that support households, businesses and the wider economy. Incremental changes will not be sufficient. Meaningful, well calibrated reforms are needed to ensure capital requirements align with risk, reduce unnecessary conservatism, and maintain the UK’s global competitiveness.”