With the high street dominated by just six lenders, there's good news for clients and intermediaries
The Bank of England’s recent decision to ease capital requirements for smaller lenders could provide a much-needed boost to their competitiveness in the UK’s vast £1.7 trillion mortgage market. The shift comes as the central bank aims to bolster the financial system’s resilience while offering more flexibility to smaller banks, which have struggled to carve out a significant market share in the face of stiff competition from major players like Lloyds, Barclays, and NatWest.
According to Reuters, the Bank of England’s revised interpretation of global Basel III rules is intended to reduce the burden on smaller lenders, giving them a greater ability to use internal models to calculate loan risks. This change is expected to help these smaller institutions offer more competitive mortgage rates. As Phil Evans, the Bank of England’s director of prudential policy, explained to Reuters, the goal is to create a “significant narrowing of the gap” between the internal models used by large firms and the standard models typically imposed on smaller banks.
Industry experts believe the new framework could lead to operational cost savings for smaller lenders, reducing their cost-to-income ratios.
“This is not about weakening the capital requirements on smaller banks,” Michelle Adcock, a director at KPMG’s Regulatory Insight Centre, told the newswire. Instead, the revised rules target reporting requirements that are less relevant to smaller players, allowing them to grow without the overwhelming administrative burdens they currently face.
The UK mortgage market remains dominated by a few large lenders, with the six biggest institutions holding more than 71% of the market share. Despite the reforms, some industry insiders suggest that mergers and acquisitions may still be necessary for smaller banks to compete effectively. Over the past year, the sector has already seen an uptick in consolidation, with Nationwide acquiring Virgin Money and Coventry Building Society merging with Co-Op Bank.
Although this is good news, we may not feel the effects immediately. The Bank of England’s changes are set to take effect in January 2026, slightly later than the initially planned mid-2025 rollout. These adjustments come after consultations with industry stakeholders, which pointed out that earlier proposals were overly conservative and could have imposed excessive costs on smaller institutions. The final rule revisions are expected to have less than a 1% impact on Tier 1 capital requirements for major UK banks, a relatively modest increase compared to the massive capital hikes following the 2007-2009 financial crisis.
The UK’s regulatory shift mirrors similar moves in the United States, where the Federal Reserve has also scaled back capital requirements for large banks. Fed vice chair Michael Barr recently announced that the increase in capital demands would be 9%, down from an initially proposed 19%, following pushback from Wall Street. Both the US and UK are attempting to balance the need for a resilient banking sector with the desire to avoid stifling growth and lending capacity.
Finance Minister Rachel Reeves welcomed the reforms, stating that they would provide greater certainty for the banking sector to support investment and growth in the UK. Reeves, along with Bank of England Governor Andrew Bailey, recently met with banking industry leaders to discuss the new rules, emphasizing the critical role banks play in the broader economy.
While these changes are largely seen as positive, there remains some concern about the broader risks that banks face, such as those related to cybersecurity and climate change, which may necessitate further updates to capital requirements down the line. “Given these reforms are almost 15 years in the making, there is a general concern across the industry about the time it has taken to reach this point,” commented Steven Hall, a partner at KPMG UK.
