With hopes that EU equivalence will be granted to UK regulations fading, the UK is planning to toughen regulations for UK banks, possibly reducing their dividend payments.
The BoE PRA has begun a consultation on scrapping a rule to allow lenders to include software investment in their core capital levels. Andrew Bailey has shared his concern that including software assets will give a “false picture of a bank’s loss absorbing capital” as they are unlikely to have a realisable value. It is also possible that this contradicts Basel standards.
Reversing this rule will prevent UK banks from investing freely in IT and make it harder for them to compete with Fintechs, big tech and European and American banks.
Dividend payments have been capped by regulators to ensure banks have enough capital to absorb losses, so reducing their loss absorbing capital levels will lead to reductions in dividends.
The EBA are thought to agree with the BoE’s approach. The EU implemented the rule, known as CRR2, in 2018 so that EU banks were not at a disadvantage compared to American banks and FinTechs. The EBA insisted on a compromise where new software spending is offset against capital over 3 years.