Committee publication · Correspondence · 13 January 2026
Letter from the Governor of the Bank of England relating to the capital requirements for domestic-focused firms, 17 December 2025
From: Business and Trade Committee
Inquiry: Financing the real economy
Summary
Governor Andrew Bailey writes to the Business and Trade Committee explaining the Prudential Regulation Authority's capital requirements framework for banks and building societies, particularly regarding credit concentration risk and SME lending. The letter clarifies how PRA policy supports financial stability whilst enabling firms to lend to households and businesses, and outlines recent Basel 3.1 reforms including preferential treatment for SME lending and a new joint PRA-FCA Scale-up Unit.
Key findings
- PRA's Pillar 2A framework requires additional capital for firms with concentrated lending (geographic, sectoral, or borrower-specific) to offset risks not captured under Pillar 1, which assumes diversified portfolios.
- PRA will undertake a two-phase review of Pillar 2A: Phase 1 addresses Basel 3.1 implementation (final policy Q2 2026); Phase 2 (consultation 2027) will assess whether to recognise benefits of regional diversification within the UK.
- Basel 3.1 reforms include new simplified SME definition (turnover not exceeding £44 million), preferential 'corporate SME' risk weight of 85% versus 100% for general corporates, and removal of 100% risk weight floor for secured commercial real estate lending to SMEs.
- PRA will introduce Pillar 2A adjustments to ensure withdrawal of SME support factor does not increase overall capital requirements for SME lending.
- PRA and FCA have launched joint Scale-up Unit to support firms during growth phases, extending existing support for early-stage innovative firms and new financial institutions.
Tone
FactualTopics
Key actors
Andrew Bailey, Liam Byrne MP, Bank of England, Prudential Regulation Authority (PRA), Financial Policy Committee (FPC), Financial Conduct Authority (FCA), Basel Committee on Banking Supervision
Notable line
“… the data suggests that lending to SMEs is riskier than lending to large corporates. But we are content to provide a preferential treatment for SME lending on the basis of very important considerations around …”
Key Quotes
“The Bank welcomes the Committee's focus on the role of the financial system in supporting investment and sustainable economic growth across the UK.”
“Pillar 2A allows the PRA to tailor the expectations around a firm's overall capital adequacy to that firm's particular risk p rofile, so as to only require the holding of additional capital at firms where that is necessary.”
“A firm with a vast majority of lending within the UK (or any other geographic region) will be more vulnerable to shocks hitting the UK (or those regions) than a firm with lending that is diversified internationally or in other ways.”
“Our analysis of the data suggests that lending to SMEs is riskier than lending to large corporates. But we are content to provide a preferential treatment for SME lending on the basis of very important considerations around the role SMEs play in driving UK growth.”
“When considering the broader changes being introduced under Basel 3.1, we do not expect capital requirements to increase at the overall level of the banking system – although the impact will vary according to each firms' portfolios.”
Source · parliament.uk record ↗