Banks face being forced to hold back billions more in cash than EU rivals

British lenders will be forced to hold back billions more in cash than EU rivals after the Bank of England demanded a strict adoption of new capital requirement rules.

The Bank’s Prudential Regulation Authority (PRA) said it would require banks to adhere to almost all of the so-called Basel 3.1 rules agreed globally, despite Brussels watering down its own regulations.

The so-called Basel rulebook was introduced in the wake of the 2008 financial crisis in a bid to safeguard against future emergencies and dictates bank capital requirements. Banks are required to keep a cash buffer in case they face heavy losses in a downturn.

It comes after The Telegraph revealed in September that the PRA was preparing to insist on a robust implementation of the rulebook in a move likely to trigger friction with ministers and City bosses.

Sam Woods, deputy governor of the Bank and head of the PRA, said: “Alignment with strong international banking standards promotes economic growth by underpinning the competitiveness of the UK as a financial centre, supporting investors’ confidence in the UK banking system and ensuring that banks can finance the economy during downturns.”

The regulator said the implementation of the reforms was consistent with countries such as Australia, Hong Kong, Singapore and Switzerland, adding that it does not expect its proposals to “significantly increase overall capital requirements on average across UK firms”.

The Bank said it would delay the implementation of the rulebook by two years until 2025, while smaller lenders will not be required to apply them.

UK Finance, the main banking lobby group, previously expressed concerns about the design of the latest Basel package.

It also comes after the PRA forced the Government to back down last week over plans to give ministers the power to overrule City regulators in an embarrassing climbdown for Prime Minister Rishi Sunak.

Meanwhile, Andrew Griffith, the City minister, said on Tuesday that the Government will relax bank ring-fencing rules as part of a “Big Bang 2.0” deregulation drive.

Ring-fencing requires banks to separate their retail banking services from their investment and international banking activities and was introduced as a response to the financial crisis.

Mr Griffith told the Financial Times’ banking summit: “We can make the UK a better place to be a bank, to release some of that trapped capital over time around the ring-fence.”

The UK’s biggest lenders will still be required to adhere to the ring fence requirements but several smaller banks, such as Santander UK, Virgin Money and TSB Bank, will likely be exempt.