The Bank of England (BoE) is reportedly planning to dilute its interpretation of the adoption of incoming international capital rules amid lender warnings its current proposals would harm the UK economy and hinder small businesses.

As first reported by the Telegraph, the Prudential Regulation Authority (PRA) previously said it would require banks to adhere to almost all of the rules set forth in Basel 3.1, which will come into force from January 2025, even though the EU itself has already watered down its intended approach to the rules.

The Basel rules were introduced after the Global Financial Crisis of 2008 as a means of safeguarding against future emergency by dictating bank capital requirements.

The PRA’s initial statement of intent would mean that UK lenders would have to hold back billions more than their EU counterparts to meet the regulations, which reportedly garnered outcry from Natwest and Barclays – the UK’s biggest lenders – with estimates they would have to hold up an extra £34 billion and £18 billion respectively on their balance sheets to meet the rules if they are to be adopted in the strictest sense.

The PRA remains intent on “robust implementation” but is softening its stance and seeking a “middle ground” on small business lending which may involve a transition period from the current framework, the Telegraph said.

The newspaper also reported that the PRA is considering the transfer of pre-existing loan arrangements in a move that would mean that banks would have to ‘ringfence’ less money on their balance sheets than would be required if the PRA adopted the rules in their strictest form.

Banks are reportedly also lobbying the PRA to dispense with plans to remove a Basel rule dubbed the "SME support factor", a measure which enables banks to ease the burden on capital requirements for credit risk on exposure for SMEs.

Of the current measures being assessed, an executive in the financial services industry told the Telegraph that the PRA’s engagement with the finance sector had been constructive, stating: “I think Sam [Woods, chief executive of the PRA] is listening.”

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