According to Financial Times News, HSBC and Barclays executives told UK lawmakers that onerous capital rules are putting British banks at a serious disadvantage against private credit groups. HSBC’s Michael Roberts revealed the private credit market is growing 15% annually and that his bank’s capital requirements are five times higher when lending directly to SMEs versus funding private credit groups lending to the same businesses. Barclays’ Stephen Dainton highlighted the massive scale of private credit giants like Blackstone, Apollo and BlackRock with combined market value over $400 billion. The testimony comes as US regulators plan unprecedented easing of banking rules that could free up $140 billion in capital, while the Bank of England’s capital requirements review results are due next month.
The regulatory arbitrage game
Here’s what’s really happening: banks are getting squeezed by their own rulebook. When HSBC lends directly to a small business, they have to hold capital against 100% of that loan’s value. But if they fund a private credit group that then lends to that same business? Suddenly it’s only 20%. That’s a massive arbitrage opportunity that basically encourages banks to become middlemen rather than direct lenders.
And private credit firms love this arrangement. They get to operate with “light rules on capital and liquidity” as Roberts put it, which lets them offer cheaper loans than banks can. It’s like having a weight handicap in a boxing match – banks are fighting with one hand tied behind their back while private credit gets to swing freely.
The too-big-to-ignore problem
Dainton wasn’t exaggerating when he said “we should not underestimate that scale.” We’re talking about firms with combined market caps over $400 billion that are basically operating as shadow banks without the same regulatory scrutiny. Remember 2008? That whole crisis started with lightly regulated entities packaging up loans and selling them to investors. Sound familiar?
But here’s the thing – regulators are in a tough spot. If they tighten rules on private credit, they risk choking off credit to businesses. If they loosen rules for banks, they potentially create systemic risk. It’s the classic regulatory dilemma: how do you maintain stability without stifling innovation?
The international domino effect
Now the US is shaking things up with plans to free up $140 billion in bank capital. That’s equivalent to $2.6 trillion in additional lending capacity according to Alvarez & Marsal research. Roberts was blunt about what this means: it will “increase pressure on UK authorities to ease rules for British banks.”
Basically, we’re watching a global regulatory race to the bottom unfold. The UK and EU have already delayed their Basel reforms waiting to see what the US does. Dainton warned that countries could diverge from the Basel agreement meant to ensure a level playing field. So much for global coordination, right?
The transparency tug-of-war
What I find interesting is Roberts’ call for forcing private credit groups to disclose “much more information” in a “somewhat similar way to the way you approach banks.” It’s a reasonable demand – if you’re going to play in the banking sandbox, you should follow similar transparency rules.
But let’s be real: private credit firms built their business models on being more agile and less regulated than traditional banks. They’re not going to volunteer for bank-level scrutiny. This is where regulators need to step in and create a level playing field – whether that means easing up on banks or tightening up on private credit.
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