The Financial Services Authority (FSA) has eased capital buffers for the UK's largest banks, meaning that loans given through the government's 'Funding for Lending' (FLS) scheme can be effectively be classed as risk-free.
According to The Financial Times on Tuesday night, the move "puts Britain at the forefront of a global experiment to use bank regulation to moderate the economy cycle".
Banks will now not need to hold extra capital against lending that qualifies for the government scheme.
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Shares in UK-headquartered banks such as Royal Bank of Scotland, Lloyds, Barclays and HSBC were making gains on Wednesday afternoon in London.
FLS, a scheme launched by the Bank of England and HM Treasury in July, is designed to boost the economy by making cheaper loans available to small businesses and households.
The FT said that the FSA has also allowed banks to hold a fixed "numerical target" for capital instead of the 10% core capital ratio imposed by the Basel III rules.
Andrew Bailey, the head of the FSA's Prudential Business Unit, said at the Edinburgh Business School on October 4th, Bailey said: "We have allowed banks to reduce the capital buffers they hold over the minimum requirements in line with new lending to the UK economy.
"Our view here is that a reduction in the risk arising from this new lending caused by an improvement in credit conditions should offset the risk from lowering capital buffers."
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