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27 January 2022

FT: UK faces unintended consequences of post-Brexit financial regulation

New rules over corporate lending and market trading mean EU rivals may soon have a competitive advantage

A year after Britain left the EU, the UK’s big banks are facing a scenario that was far from the vision of Brexit’s architects: their EU rivals could soon be able to lend more cheaply to British corporates than they can. The EU’s banks are getting a helping hand because of the bloc’s decision to break with some of the final parts of Basel III, the globally agreed capital rules.

This will allow EU banks to use less capital when they make loans to corporates without a credit rating, reducing their lending costs. Before Brexit, the UK’s banks would have benefited from the same relief. “It’s a big issue,” said a senior executive at a large UK bank. “There’s a risk . . . that BNP can lend to a load of higher quality UK corporates at cheaper rates than UK banks . . . Open markets only work if everybody is playing by global rules.”

Corporate lending is just one of the areas of possible post-Brexit divergence the City of London is watching with trepidation in 2022 as the EU and the UK advance new financial regulations at a pace not seen since the immediate aftermath of the 2007-08 crisis.

Work in progress in both jurisdictions includes fleshing out plans to overhaul markets regulation, detailing how the UK will implement the latest Basel banking accords and creating new digital asset and anti money laundering regimes in the EU. “Divergence is not going to happen through a roll back of historic rules, it’s going to come from the different approach to rulemaking,” said Simon Gleeson, lawyer and partner at Clifford Chance.

Banks say different rules in the EU and UK will push up administrative costs for companies trying to comply with two regimes. If the PRA does not adopt the same approach as the EU with respect to unrated corporations, then EU banks may be able to lend more cheaply to UK corporates, hollowing out their traditional UK corporate lending focus Simon Hills, UK Finance

A key area of concern for finance executives, industry groups and advisers is the latest package of global banking rules agreed in Basel in 2017. The EU in November published hundreds of pages for implementation. British banks must wait until the second half of 2022 to see if the Bank of England will give banks the same relief on corporate and business lending. A person familiar with the plans said the BoE’s Prudential Regulation Authority would consult industry and take their concerns into account. Still, UK banks and their advisers are bracing themselves for tougher treatment on capital generally than their peers in the EU, with particular concerns around business lending....

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