The Bank of England will relax Basel III capital requirements for investment banks' trading operations, marking the latest retreat from post-crisis reforms. Regulators warned the original rules proved too punitive and could damage UK market competitiveness. The move aligns with similar adjustments by US and European authorities who have also scaled back market risk frameworks.

Deputy governor Sam Woods said the changes would maintain appropriate capitalization while supporting international alignment. Regulators found only a small number of banks planned to use internal models under the stricter original regime, suggesting many would exit UK markets rather than comply. This threatens liquidity in British wholesale markets and undermines economic support.

The Prudential Regulation Authority estimates eleven major banks conduct 95% of UK capital markets activity affected by the rules. More than two-thirds operate through UK subsidiaries of foreign banks, primarily US firms. These institutions could reduce capital requirements by roughly a third, or £700mn, by using internal models instead of standardized approaches.

Implementation now shifts to January 2028, giving regulators time to observe how other jurisdictions apply the reforms. The adjustments signal growing recognition that post-2008 banking rules may have overreached in constraining market-making activities essential for economic function.