BoE's Bold Move to Boost Banking Flexibility

The Prudential Regulation Authority is consulting on raising the retail deposits leverage ratio threshold by £20 billion to support smaller banks amid inflation and GDP growth, thus promoting economic growth and innovation while maintaining a balance in financial risk management.

The Prudential Regulation Authority (PRA) is taking a significant step by proposing an increase in the retail deposits leverage ratio threshold. This change is aimed at enabling smaller lenders to bypass strict leverage rules imposed on major banks, thereby supporting growth and innovation in the banking sector.

Since 2016, the threshold has remained unchanged in cash terms, causing smaller banks to fall under its purview as the economy and inflation have risen. The Bank of England announced that the threshold would be raised by £20 billion, now standing at £70 billion, to align with nominal GDP growth over the past nine years.

BoE Deputy Governor Sam Woods emphasized the importance of proportionate measures in safeguarding economic stability. The changes are expected to foster increased flexibility for smaller banks to expand before they face the full regulatory weight of the leverage regime. Nonetheless, current non-UK asset thresholds remain unchanged, reflecting the regulator's balanced approach to economic expansion and risk management.

(With inputs from agencies.)