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Britain’s biggest lenders have accused the Bank of England of publishing a flawed comparison of UK and US capital requirements, complaining it ignores a growing advantage their Wall Street rivals gain from massive digital investments.
A big easing of banking restrictions under President Donald Trump’s administration has benefited US banks relative to their UK rivals, in part because of how their software investments are treated by watchdogs, according to a new study.
The lobbying drive by Britain’s top banks is designed to appeal to the UK’s new government under Prime Minister Andy Burnham and chancellor John Healey, arguing that easing restrictions imposed on the sector after the 2008 financial crash would boost economic growth and IT investment.
City of London bosses also hope the arrival of former Barclays executive Katharine Braddick as the UK’s top banking regulator at the start of this month has presented an opportunity for their arguments to carry more weight.
The BoE said in December that capital requirements for big UK banks were lower than for their US peers, even after adjusting for differences in how the rules are applied in each region, as it justified a decision to only modestly ease key restrictions on the sector.
However, several of the UK’s big banks have commissioned a rival study, which calculated their capital requirements were already higher than their US rivals on a like-for-like basis, in large part because of differences in how software investments are treated.
The UK study also found the transatlantic divergence was set to widen further owing to planned banking deregulation by Washington.
The US and UK have different rules for how banks calculate their key capital requirement, known as common equity tier 1 (CET1), which measures how much loss-absorbing capital they need as a percentage of their assets after adjusting for riskiness.
This makes it difficult to compare bank capital requirements between both countries. It also leaves more scope for arguments on how like-for-like numbers should be calculated.
The unpublished British study found the country’s biggest international banks — HSBC, Standard Chartered and Barclays — had average capital requirements of 11.8 per cent, above the 10.6 per cent equivalent for the top six US banks, such as JPMorgan Chase, Citigroup and Goldman Sachs.
But after adjusting for several transatlantic differences, including the way investments in software are treated from a capital perspective, the study found big UK banks have equivalent capital requirements 1.3 percentage points higher than their main US rivals.
UK banks have to deduct software assets from regulatory capital, unlike their US rivals, which apply a risk weight to such assets instead. EU banks are allowed to deduct software assets from capital over time.
After adjusting for the expected impact of US regulatory easing, the study estimated the UK banks would end up with like-for-like capital requirements 1.9 percentage points above their US rivals. That is worth about £22.5bn of CET1 capital or £750bn of extra lending capacity.
Deductions for software investments knocked about £5.5bn off big UK banks’ capital levels in 2024, an increase of about 4 per cent from a decade earlier, according to trade body UK Finance. It said last year that aligning this rule with other jurisdictions would “encourage further investment in developing software for ongoing use by UK banks”.
However, officials at the BoE’s Prudential Regulation Authority appear determined to keep their capital treatment of banks’ software investments, which is based on an assessment that such assets would have no value to absorb losses in a crisis.
“When the PRA made the decision to maintain the requirement for full capital deduction of software assets, it drew on evidence — including from firms — that the realisable or recoverable value of software assets could not absorb losses effectively in liquidation or in stress,” the BoE said earlier this month. “It has not received evidence that leads it to change that assessment.”
