CP2/25 – Leverage Ratio: changes to the retail deposits threshold for application of the requirement

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Responses are requested by 5 June 2025.

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Responses can be sent by email to: CP2_25@bankofengland.co.uk.

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Capital & Compensation Standards Team
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1: Overview

1.1 This consultation paper (CP) sets out the Prudential Regulation Authority’s (PRA) proposal to adjust one of the thresholds for application of the Leverage Ratio – Capital Requirements and Buffers Part of the PRA Rulebook (the proposed changes are in Appendix 1).^{footnote [1]} The PRA also proposes to make minor consequential changes to supervisory statement (SS) 45/15 – The UK leverage ratio framework (these changes are in Appendix 2).

1.2 The leverage ratio is a simple indicator of a firm’s solvency, measuring a firm’s capital resources relative to its exposures without risk-weighting. Its objective is to guard against – as a backstop measure – the risk of errors and uncertainties in assigning risk weights. It can also limit excessive balance sheet growth or act as a constraint to such excess before it occurs.

1.3 In the UK, the leverage ratio applies as a requirement to ‘major UK banks, building societies and investment firms’, as well as those firms with ‘significant non-UK assets’. This requirement is set out in the PRA Rulebook, implementing a Direction by the Financial Policy Committee (FPC) to the PRA on the leverage ratio. Other firms are subject to a PRA supervisory expectation on the leverage ratio, as set out in SS45/15.

1.4 The PRA proposes to increase the threshold for the requirement that is designed to capture major UK banks, building societies and investment firms from £50 billion retail deposits to £70 billion retail deposits. This is to ensure that the set of firms subject to the requirement reflects the risk appetite behind the UK leverage ratio framework and to preserve the proportionality of the framework. In particular, the proposal aims to address inadvertent regulatory tightening caused by nominal UK GDP growth – as a broad measure encompassing both real economic growth and inflation – since the threshold was implemented in 2016. No changes are proposed to the threshold for identifying banks, building societies and investment firms with significant non-UK assets that should be subject to the requirement as this is judged to remain appropriate, as set out more fully in Chapter 2, paragraph 2.12.

1.5 This CP is relevant to Capital Requirements Regulation (CRR) firms and CRR consolidation entities on an individual, consolidated, and where relevant, sub-consolidated basis. None of the proposals in this CP are relevant to credit unions.

1.6 The PRA has a statutory duty to consult when changing rules (section 138J of the Financial Services and Markets Act (FSMA),or making new standards instruments (s138S of FSMA). When not making rules, the PRA has a public law duty to consult widely where it would be fair to do so. 

1.7 The PRA has assessed the costs and benefits of the proposal. Overall, the PRA does not consider that there are material costs to firm-level resilience or financial stability because the PRA is returning the threshold to the same level once it is adjusted for real economic growth and inflation. There could be some benefits in relation to supporting competition and, at the margin, competitiveness and growth. In particular, some firms would benefit from having more space to grow before becoming subject to the leverage ratio requirement, which has associated capital and operational costs. Details of the PRA’s analysis of the costs and benefits are covered in Chapter 2.

1.8 The PRA is required to establish and maintain a Cost Benefit Analysis (CBA) Panel under s138JA of FSMA 2000. The CBA panel was consulted on the CBA analysis for this proposal. The Panel provided helpful feedback, which has been incorporated into Chapter 2, as follows:

• A key issue discussed with the Panel was the level of transparency this CP could provide regarding the firms affected and the impact of the proposals on them, considering the small number of firms involved and the related confidentiality concerns. The CBA Panel suggested that the PRA provide more detail about the number and type of affected firms. The PRA has done so in paragraph 2.27 of this CP, subject to the limits of confidentiality. Paragraph 2.38 further sets out that, while potential impacts of the proposal on capital requirements and the Minimum Requirement for Own Fund and Eligible Liabilities (MREL) were assessed quantitatively, these figures cannot be shared for confidentiality reasons.
• The CBA Panel suggested that the PRA provide more detail on the reasons why it is proposing to increase the threshold in line with nominal GDP growth. The PRA has included further detail on this in paragraph 2.9, including why it considers that nominal GDP is in this case a more suitable measure for determining the increase in the threshold than alternative indicators.
• The CBA Panel suggested that the PRA clarify the implications of the proposed increase in the retail deposits threshold for the affected firms. In response to the Panel’s suggestions, the PRA has included a more detailed explanation of the differences between the leverage ratio requirement and the PRA supervisory expectation on the leverage ratio at paragraphs 2.4 and 2.27. Additionally, Chart 1 summarising the main differences has been included.
• The CBA Panel commented on several presentational elements to ensure that the objectives of the proposals and their impacts are clearly explained and detailed, helping stakeholders to understand the policy proposals, the underlying analysis and the CBA assessment. Several changes were made to the CBA, and the broader CP, to address these comments – for example by providing more detail on the PRA’s rationale for not making changes to the non-UK assets threshold at this stage.

1.9 The PRA also consulted the PRA Practitioner Panel about the proposals in this CP. The Practitioner Panel was broadly supportive of the proposed increase in the retail deposits threshold, and of the PRA’s plan to keep both thresholds for application of the leverage ratio requirement under regular review in future.

1.10 In carrying out its policymaking functions, the PRA is required to comply with several legal obligations. The analysis in this CP explains how the proposals have had regard to the most significant matters, including an explanation of the ways in which having regard to these matters has affected the proposals.

Implementation

1.11 The PRA proposes that the implementation date for the changes resulting from this CP would be 1 January 2026.

Responses and next steps

1.12 This consultation closes on Thursday 5 June 2025. The PRA invites feedback on the proposals set out in this consultation. Please address any comments or enquiries to CP2_25@bankofengland.co.uk.

1.13 When providing your response, please tell us whether or not you consent to the PRA publishing your name, and/or the name of your organisation, as a respondent to this CP.

1.14 Please also indicate in your response if you believe any of the proposals in this consultation paper are likely to impact persons who share protected characteristics under the Equality Act 2010, and if so, please explain which groups and what the impact on such groups might be.

1.15 Unless otherwise stated, any references to EU or assimilated legislation refer to the version of that legislation which forms part of assimilated EU law.

2: The PRA’s proposal to increase the £50 billion retail deposits threshold for the leverage ratio requirement

The UK leverage ratio framework

2.1 The leverage ratio is a simple indicator of a firm’s solvency that relates its capital resources to a measure of its exposures (referred to in PRA rules as the ‘total exposure measure’).^{footnote [2]} The lower a firm’s leverage ratio, the less the firm uses regulatory capital to fund its activities. The general principle behind the leverage ratio is that it should be a backstop that captures the exposures of a firm, whether on- or off-balance sheet, on a risk-insensitive basis.

2.2 Following a Direction from the FPC, the PRA must apply a leverage ratio requirement to ‘each major UK bank, building society or investment firm’ (henceforth ‘major UK firms’) as well as ‘each UK bank, building society or investment firm with significant non-UK assets’. The requirement consists of a minimum requirement of 3.25% of Tier 1 capital and two buffers: a countercyclical leverage buffer (CCLB) and, for systemic firms, an additional leverage ratio buffer (ALRB). The FPC has a statutory requirement to review this Direction on an annual basis, and last confirmed its appropriateness in October 2024.

2.3 To meet this Direction, the PRA sets thresholds to capture firms that should be subject to the leverage ratio requirement. These thresholds are currently set at:

• £50 billion in retail deposits (implemented on 1 January 2016, following the publication of PS27/15 – Implementing a UK leverage ratio framework in December 2015) for the major UK firms; and
• £10 billion in non-UK assets (implemented on 1 January 2023, following the publication of policy statement (PS)21/21 – The UK leverage ratio framework) for firms with significant non-UK assets.

2.4 Any firm crossing either of these thresholds – calculated on an individual, consolidated, and sub-consolidated basis as applicable – is subject to the Leverage Ratio: Capital Requirements and Buffers Part of the PRA Rulebook. Firms not meeting these thresholds are subject to a PRA supervisory expectation that their leverage ratio should not ordinarily fall below 3.25%, as set out in SS45/15.

2.5 The separation between the leverage ratio requirement and the PRA supervisory expectation reflects the risk appetite behind the UK leverage ratio framework, as set by the FPC and PRA in a comprehensive review of the framework in 2021 (and reviewed by the FPC annually). Under this risk appetite, application of a leverage ratio requirement is appropriate for firms that are large, have complex business models, and are inextricably interlinked with the UK financial system – and therefore pose most risk to UK financial stability. But for smaller firms it could result in a disproportionate increase in their cost of capital, relative to the prudential benefits it would bring. This could be as a result of the application of leverage ratio buffers under the requirement, or because, where a firm’s leverage ratio minimum requirement is higher than its risk-weighted requirements, the firm will be subject to a leverage-based MREL that is higher than the risk-weighted one, which can mean that a firm has to hold more equity and eligible debt to support its resolution.^{footnote [3]} The PRA supervisory expectation – which does not involve buffers or result in a leverage-based MREL – is judged by the PRA to provide a more proportionate tool to mitigate the risk of excessive leverage for these smaller firms.

The PRA’s proposals on the leverage ratio thresholds

2.6 Over time, thresholds that are set in nominal terms can ‘tighten’ as inflation and other factors increase the nominal size of the economy – capturing a different set of firms than originally intended. This can occur as a result of nominal economic growth over the period since the threshold was implemented, which is in turn driven by both real economic growth and nominal price inflation. PRA CEO Sam Woods has referred to this as ‘prudential drag’. The PRA considers that the retail deposits threshold is now leading to prudential drag – with firms which are not ‘major’ at risk of being captured by it, which would be inconsistent with the FPC’s Direction and underlying risk appetite.

2.7 To address this, the PRA proposes to increase the retail deposits threshold, with the proposed increase based on the growth in nominal UK GDP observed between 2016 Q1 (when the threshold came into force in PRA rules) and 2024 Q2 (the latest point in time for which official Office for National Statistics (ONS) data on nominal GDP were available when the PRA agreed the proposal). This would result in a proposed new threshold of £70 billion retail deposits, £20 billion higher than the current threshold.^{footnote [4]}

2.8 The PRA considers that this increase would ensure that the retail deposits threshold captures ‘major’ UK firms, as directed by the FPC, and would be consistent with the original risk appetite underlying the UK leverage ratio framework.

2.9 The PRA’s choice of UK nominal GDP as the proposed measure for increasing the retail deposits captures both potential sources of economic growth and inadvertent prudential drag – real economic growth and inflation – unlike, for example, the GDP deflator, which just captures the impact of inflation. It is also an economy-wide indicator which was judged to be most appropriate in this circumstance, unlike, for example, the Consumer Price Index. It was also judged to be more suitable than using a measure of the size of the financial sector, as that would not take into account changes in the size of the financial system relative to the economy, which is an important factor relating to risk appetite.

2.10 Thresholds of £50billion retail deposits have historically being used, and are still used, in other regulatory frameworks operated by the Bank of England and PRA. Particularly, up until recently, £50billion retail deposits was the threshold used for determining participation in the Bank’s stress test.^{footnote [5]} Because of this, the PRA had previously committed to keeping the retail deposits threshold for the leverage ratio under review alongside any reviews of the stress test framework (though it is worth noting that there are no legal or conceptual dependencies between the two frameworks).

2.11 In developing this proposal, the PRA took account of the recent changes to the approach to determining the coverage of the Bank Capital Stress Test. Based on these changes, participation in the stress test is now based on an assessment of a bank’s share of lending to the UK real economy, other measures of its systemic importance, and the test’s overall coverage of the banking sector’s lending to the UK real economy. For setting the leverage ratio requirement for major UK firms, the PRA considered that the risk appetite behind the leverage ratio framework (as set at the time of implementation of the framework and reviewed in 2021) remained appropriate, and that any proposed change to the retail deposits threshold should aim to restore that risk appetite. It further considered that a single numerical threshold remained most appropriate for the leverage ratio framework, to aid predictability and transparency, and that retail deposits remains a suitable metric, given the consequences that the failure of firms which exceed the threshold would have for depositors, and so financial stability.

2.12 The PRA has also considered the appropriateness of the £10 billion non-UK assets threshold and does not propose to change it at this time. As noted in paragraph 2.3, this threshold was implemented more recently, in 2023, and the PRA has found no substantial evidence of prudential drag in relation to it. PRA analysis suggests that, after accounting for nominal GDP growth since its implementation, the threshold would not be materially different to today.^{footnote [6]} Furthermore, the population of firms captured by this threshold remains consistent with the FPC’s intentions for the leverage ratio framework.

2.13 The PRA intends to regularly assess the effectiveness and appropriateness of both thresholds for application of the leverage ratio requirement in future – as part of the FPC’s annual reviews of the overall leverage ratio framework – and update them where appropriate. For example, the PRA expects it would update either or both thresholds during periods of sustained nominal GDP growth.

Existing modifications by consent

2.14 On 10 September 2024, the PRA offered firms meeting certain criteria modifications by consent to disapply the Leverage Ratio – Capital Requirements and Buffers Part of the PRA Rulebook while the PRA was reviewing the thresholds for its application. If the proposals set out in this CP are implemented, the PRA intends to revoke the modifications granted, and withdraw the offer of the modification by consent, shortly after the draft rules in Appendix 1 are implemented.

PRA objectives analysis

2.15 The PRA considers that the proposal would preserve the safety and soundness of firms by maintaining strong prudential standards. The proposal ensures that major firms, which can pose a greater risk to the financial stability of the UK, are subject to leverage ratio requirements, with the set of those major firms reflecting the risk appetite of the FPC and PRA, in relation to their size relative to the economy. Firms which fall below the increased retail deposits threshold (and the non-UK assets threshold) will remain subject to the PRA supervisory expectation on the leverage ratio, as a proportionate way of guarding against shortcomings in their risk measurement or risks from excessive leverage.

2.16 The PRA has assessed whether the proposal in this CP facilitates effective competition, the international competitiveness of the economy and the growth of the economy in the medium to long term.

2.17 The PRA considers that the proposal would ensure that the leverage ratio requirement continues to apply to UK firms that are more likely to represent a systemic risk to UK financial stability. Smaller firms below the threshold would have more space to grow before becoming subject to a leverage ratio regime that could involve meeting higher requirements (including potentially higher MREL requirements), as set out in paragraph 2.5. As a result, this proposal helps to facilitate competition and should, at the margin, support the international competitiveness and growth of the economy in the medium to long term.

Cost benefit analysis (CBA)

2.18 This section outlines the PRA’s assessment of the costs and benefits associated with the proposals set out in this CP.

2.19 Overall, the PRA expects some benefits for a small group of firms that would not be in scope of the leverage ratio requirement as a result of its proposals. The more material benefits would be for the firms within that group that would otherwise be ‘bound’ by the leverage ratio requirement – ie have higher capital requirements under the leverage than the risk-weighted regime – as these firms would face lower capital requirements and would not, as determined by the Bank of England, be subject to a leverage-based MREL.

2.20 The proposals could also have benefits in relation to the PRA’s secondary objectives for competition and competitiveness and growth. Smaller UK firms would have more scope to grow before becoming subject to the requirement, and lower requirements might translate into additional lending, although these effects are expected to be relatively minor.

2.21 The PRA also expects some benefits for all affected firms in the form of operational and compliance cost savings.

2.22 No direct costs have been identified for firms. There would be some small costs in terms of safety and soundness and financial stability, as a result of the leverage ratio requirement applying to a smaller population of firms than would otherwise be the case. But the PRA does not consider these costs to be material, and they are within the original risk appetite underlying the leverage ratio framework, with the leverage ratio requirement continuing to apply to the firms that are most likely to affect UK financial stability.

2.23 In preparing this CBA, the PRA has considered a range of sources, including regulatory returns, firms’ business plans and insights from supervisory engagement. All assessments (quantitative and qualitative) are subject to underlying assumptions and uncertainty in relation to firms’ behavioural responses.

Case for action

2.24 The PRA considers that the retail deposits threshold for the leverage ratio requirement has become increasingly binding over time, as a result of inflation and growth in the economy. This has inadvertently tightened the leverage ratio framework. Consequently, the requirement no longer exclusively applies to the ‘major’ UK firms, as directed by the FPC. Absent changes, the threshold would start to capture firms that have not become more systemic in nature, as their contributions to the UK financial system and economy have remained broadly unchanged. Over time, this issue could become more acute, with an increasing number of firms being inappropriately captured by the threshold. While the provision of waivers may mitigate the issue in the short term, changing Rules is both more transparent and more efficient for firms and the PRA.

2.25 The PRA therefore proposes to raise the threshold based on nominal GDP growth since its introduction. As set out in more detail in paragraph 2.7, this would result in a new threshold for application of the requirement of £70 billion retail deposits.

Counterfactual and comparison against the PRA’s proposals

2.26 In preparing this CBA, the PRA has assessed its proposals against a counterfactual in which no changes would be made to the retail deposits threshold.

2.27 The PRA has found that a small number (fewer than five) of UK firms^{footnote [7]} that are currently subject, or would likely soon become subject to, the leverage ratio requirement under the counterfactual would be out of scope of the requirement upon implementation of this proposal (henceforth, the ‘affected firms’). More firms could potentially come into scope of the leverage ratio requirement under the counterfactual over time. As such, the population of UK firms subject to the leverage ratio requirement would be larger under the counterfactual than under the PRA’s proposals.

2.28 Whether or not a firm is subject to the leverage ratio requirement can have several consequences for the firm, as set out below and in the Chart. Specifically:

• Firms outside the scope of the leverage ratio requirement are not subject to the leverage ratio buffers, and so are not required to hold capital against those. This has concrete implications for firms that would otherwise be bound by the leverage ratio requirement: it means that their capital requirements will be lower overall, across the leverage ratio and risk-weighted frameworks. For firms that are bound by their risk-weighted requirements, application of the leverage ratio requirement does not change the amount of capital they are required to hold;
• If a firm is not subject to the leverage ratio requirement, its MREL (where applicable) will be calculated based on its risk-weighted requirements. Conversely, firms in scope of the leverage ratio requirement are also subject to a leverage-based MREL, and this will be higher than the risk-weighted MREL for firms whose leverage ratio minimum requirement is higher than their risk-weighted requirements (see also paragraph 2.5 above);
• Firms not subject to the leverage ratio requirement do not have to comply with certain operational requirements. These mainly take the form of additional reporting and disclosure requirements.

Differences between the leverage ratio requirement and the PRA supervisory expectation

Affected firms and markets

2.29 The affected firms are mainly providers of lending to the UK real economy, operating in all the main traditional categories of bank lending, particularly retail mortgage lending. They represent, in aggregate, around 9% of UK real economy lending and 3% of system-wide leverage – both figures have remained broadly unchanged in recent years. By comparison, firms that would remain subject to the leverage ratio requirement represent, in aggregate, around 80% of UK real economy lending and 66% of system-wide leverage. The affected firms all currently operate leverage ratios well in excess of the 3.25% minimum.

2.30 The affected firms have been identified based on current regulatory returns and business plans. No other firms are currently close to the existing threshold, however the firms in this cohort could change over time, depending on the pace of retail deposits growth of other mid-tier firms.

Causal chain analysis of impacts for firms and their behaviours

2.31 The PRA does not expect the affected firms to change their business models fundamentally, for example, by becoming significantly more leveraged than at present, as a result of not being subject to the leverage ratio requirement. The firms would continue to be subject to the PRA supervisory expectation that firms’ leverage ratios should not ordinarily fall below 3.25% of Tier 1 capital. The PRA considers that the expectation provides an effective, proportionate safeguard against the risk of excessive leverage for smaller UK firms – as evidenced by the fact that the affected firms already subject to the expectation have leverage ratios well above the 3.25% minimum.

2.32 That said, as set out in paragraph 2.28, not being subject to the leverage ratio requirement can give rise to benefits for firms – particularly where it translates into lower overall capital requirements and/or lower MREL.

2.33 A sub-set of the affected firms would face lower capital requirements and MREL as a result of the PRA’s proposals, as the leverage ratio requirement would otherwise be binding for them. These benefits may however be transitory. Based on their business plans, the firms in question could plausibly exceed the proposed new threshold over the near-to-medium term. The PRA does not expect its proposals to cause firms to change their behaviour to stay below the proposed new threshold, for example by managing their balance sheets differently or stopping competition for deposits. Such actions would be inconsistent with the firm’s business and growth strategies.

2.34 The PRA does not expect these capital and MREL benefits to apply to other affected firms. Those firms are currently bound by their risk-weighted requirements, and so would not see any changes in their overall capital requirements and MREL under the PRA’s proposals relative to the counterfactual. As such, the PRA does not expect its proposals to change the behaviours or incentives of these firms.

2.35 As noted in paragraph 2.28, as a result of being outside the scope of the leverage ratio requirement, the affected firms would also not face certain operational costs – mainly in the form of additional reporting and disclosure requirements. In particular, they would not be required to report and disclose average values (in addition to period-end values) for their exposures, and they would not have to report data on contingent leverage risk to the PRA.

2.36 The PRA does not expect this to change the behaviours of the affected firms. The additional reporting and disclosure requirements in question are more relevant to firms with different business models, focussed on participation in financial markets.^{footnote [8]}

2.37 The PRA does not expect its proposals to have any implications for firms that currently are – and would, under its proposals remain – subject to the leverage ratio requirement, as their situation would remain unchanged.

Assessment of benefits for firms

2.38 The PRA has estimated the reduction in capital requirements and MREL under its proposals compared to the counterfactual, but due to the small number of firms affected, it cannot disclose these estimates. Based on standard PRA assumptions relating to the cost of capital, the PRA estimates that the benefits in aggregate, while uncertain, could in some scenarios, exceed £10million per year when annualised over 10 years, which is the PRA’s materiality threshold for consulting the PRA’s CBA Panel.^{footnote [9]}

2.39 The PRA estimates the operational cost savings (both one-off and ongoing) for the affected firms to be in the region of £130,000 per annum. These estimates are mainly driven by staff time savings. Cost savings for firms from not having to make one-off investments in their reporting systems are also captured, but the PRA would expect these to be small in practice, as all affected firms already have systems in place to report and disclose leverage ratio data on a regular basis. In calibrating these estimates, the PRA has used a PRA Standard Cost Model for quantifying direct operational costs to firms, and it has considered its previous estimates of the costs of new reporting requirements on contingent leverage.

Assessment of other benefits

2.40 The PRA expects the proposal to have some beneficial effects for competition in the affected markets, in particular the retail lending mortgage market. As set out in paragraph 2.20, smaller firms below the threshold would have more space to grow before becoming subject to the leverage ratio requirement that could require higher capital holdings, and possibly higher MREL. Over time, this could benefit more than just the affected firms discussed in this CP, as more UK firms could grow towards £50billion retail deposits.

2.41 Lower capital requirements and MREL, as set out in paragraph 2.20, might have a marginally positive impact on the supply of credit to the UK economy, and so GDP. Firms affected in this way could choose to invest, including by expanding their credit to the UK real economy. Due to uncertainty about firms’ behavioural responses, and the small size of the benefiting firms relative to the UK economy, the PRA cannot however assess those macroeconomic effects quantitatively.

2.42 As noted in paragraph 2.5, the proposals also have benefits for the use of the PRA’s resources, by ensuring that the leverage ratio requirement continues to apply – and the PRA’s supervisory attention is focussed – where it matters most.

Assessment of costs

2.43 The PRA does not expect its proposals to result in additional costs for firms, as the population of firms captured by the leverage ratio requirement would be reduced relative to the counterfactual.

2.44 The proposals could have some small costs in terms of the safety and soundness of the affected firms or for UK financial stability, as fewer firms would be subject to a leverage ratio requirement than otherwise; but the PRA does not assess these costs to be material. The proposed new threshold would capture UK firms that, because of their size and complexity, present greater risk to financial stability, and therefore warrant a leverage ratio requirement, as intended by the FPC in its Direction to the PRA. Firms with retail deposits below the proposed new threshold would in any case be subject to the PRA supervisory expectation in relation to the leverage ratio, as a proportionate way of guarding against shortcomings in their risk measurement or the risks from excessive leverage.

2.45 While under the PRA’s proposals the CCLB would apply to a smaller population of firms than otherwise, the PRA does not expect this to materially affect the operation of macroprudential policy by the FPC, through changes to the Countercyclical Capital Buffer (CCyB) and CCLB rates. This is considering the generally small number of affected firms, and the fact that only a small sub-set of those firms would otherwise be bound by the leverage ratio requirement.^{footnote [10]} Further, the PRA considers that not applying leverage ratio buffers to the affected firms is consistent with the FPC’s risk appetite, whereby only major UK firms (and larger internationally active firms) warrant a leverage ratio requirement.

Summary of benefits and costs

2.46 Overall, the PRA does not consider that there are material costs to firm-level resilience or financial stability. There could be some benefits in relation to supporting competition and, at the margin, competitiveness and growth. For firms, there will be benefits to some that have more space to grow before becoming subject to the requirement, with the associated capital and operational costs.

‘Have regards’ analysis

2.47 In developing these proposals, the PRA has had regard to the FSMA regulatory principles and aspects of the Government’s economic policy as set out in the HMT recommendation letter from November 2024. The following factors, to which the PRA is required to have regard, were significant in the PRA’s analysis of the proposal:

• The principle that a burden or restriction which is imposed on a person should be proportionate to the benefits which are expected to result from the imposition of that burden: the proposed approach of raising the retail deposits threshold capturing major UK firms, while maintaining the PRA supervisory expectation for smaller firms, ensures that the leverage ratio will continue to apply in proportion to firms’ size and complexity. In particular, by ensuring that the leverage ratio requirement only continues to apply to the major UK firms, the PRA intends to avoid disproportionate costs for smaller firms that are close to exceeding the current threshold.
• ‘Contribution of the financial services sector to overall economic growth’ (2024 HMT recommendation letter to PRC): increasing the threshold ensures that smaller firms below the threshold would have more space to grow before potentially becoming subject to higher capital requirements driven by the leverage ratio regime. As a result, affected firms which are or expect to be leverage-constrained would have greater flexibility to invest; given the business models of those firms, any additional investment would probably take the form of lending to the economy.
• ‘Efficient and economic use of PRA resources’ (FSMA regulatory principle): The proposal supports the efficient and economic use of the PRA’s resources, by ensuring that the leverage ratio requirement continues to apply where it matters most.
• ‘Transparency’ (FSMA regulatory principle): The proposal aligns with transparent policymaking, as the calculation for the proposed increase in the threshold is based on official public data and covers a clearly defined timeframe.

2.48 The PRA has had regard to other factors as required. Where analysis has not been provided against a ‘have regard’ for this proposal, it is because the PRA considers that ‘have regard’ to not be a significant factor for this proposal.

Impact on mutuals

2.49 The PRA is required to consider whether the proposed new rules will have a significantly different impact on mutual societies compared to other authorised firms.

2.50 The PRA expects that smaller mutuals would not be affected differently from their peer banks. Under the proposal, and as previously described, some firms would benefit from additional space to grow before becoming subject to higher minimum capital requirements driven by the leverage ratio regime. The PRA does not expect this benefit to be any greater for affected mutuals than for a peer bank, given that the cost of capital for smaller firms is generally similar, regardless of whether they are mutuals.

2.51 Mutuals which are sufficiently large enough to be captured by the increased retail deposits threshold could be affected differently from banks. For example, they may face greater challenges than banks in issuing Additional Tier 1 capital (AT1) – generally a cheaper form of capital – to meet any increase in capital requirements, because of more limited access to capital markets. Nonetheless, we think that this is justified prudentially. Mutuals will only become subject to the requirement as a consequence of having grown sufficiently to pose a greater risk to the UK financial system, to the point where a stronger guardrail against shortcomings in risk measurement is warranted.

Equality and diversity

2.52 In developing its proposals, the PRA has had due regard to the equality objectives under s149 of the Equality Act 2010. The PRA considers that the proposals do not give rise to equality and diversity implications.