The Bank of England capital rules for UK lenders are set to be relaxed, the central bank’s Financial Policy Committee (FPC) confirmed, even as it raised the probability of multiple overlapping shocks hitting the financial system simultaneously. The FPC cut the minimum system-wide Tier 1 capital benchmark to around 13% of risk-weighted assets at the end of 2025, down from around 14% previously, equivalent to a Common Equity Tier 1 (CET1) ratio of around 11%.
The shift marks a 1 percentage point reduction from the prior benchmark, which the FPC had set after accounting for gaps in the measurement of risk-weighted assets and the neutral rate for the UK’s countercyclical capital buffer, according to the Bank’s Financial Stability in Focus assessment of bank capital requirements.
Bank of England Capital Rules: What Changes for Lenders
The FPC said it would work with regulators on a package of ‘broad reforms’ to make capital requirements ‘more proportionate and more effective’. Domestic-focused banks, including Nationwide, NatWest and Lloyds, stand to benefit most, with billions in capital currently locked in buffers potentially freed up.
The plans include removing the countercyclical leverage buffer, an emergency financial cushion for lenders. The FPC also intends to align calculations for systemically important banks with international standards, and to redesign core rules so a larger share of required reserves can be deployed for lending to households and businesses in a stress scenario.
The leverage ratio framework has a prior adjustment on record: in 2016 the FPC excluded central bank reserves from the UK leverage exposure measure to avoid hampering monetary policy transmission, and in 2017 it recalibrated the leverage ratio minimum to 3.25% for the same reason, according to the Bank’s Financial Stability in Focus publication.
Banks had lobbied hard for the changes. A report earlier this year from the Association for Financial Markets in Europe (AFME), which represents over 150 global banks including the UK’s ‘big four’, called for an end to ‘excessive conservatism’ in banking regulation.
Governor Andrew Bailey said it would be ‘inappropriate’ for the Bank to dictate how freed-up capital is deployed. ‘There is a decision to be taken in banks and with shareholders on how that capital is used… those decisions should be taken by institutions in a market economy,’ he said.
Overlapping Risks Have Grown Since December
The FPC’s loosening of Bank of England capital rules came alongside a sharper warning on the risk outlook. The committee said the likelihood of large and overlapping shocks occurring simultaneously had ‘increased’ since December, ‘potentially amplifying their combined impacts on financial stability’.
Geopolitical tensions, global trade fragmentation, and pressures on sovereign debt markets remained elevated as of the FPC’s October 2025 meeting, the committee noted in its October 2025 quarterly record.
Artificial intelligence added a further dimension. The FPC said the ‘rapid progress’ in AI capabilities this year had increased ‘risks to financial stability from cyber and operational vulnerabilities’. It pointed to self-reinforcing capital loops as one specific concern: ‘One example of this is when technology companies invest in AI companies which in turn purchase those technology companies’ products. This creates self-reinforcing capital loops.’
The committee added that equity valuations looked stretched beyond the AI sector. Excluding the top 30 AI-related stocks, the cyclically adjusted earnings yield compared with 10-year government bond yields was still the lowest since 2007, the FPC said. That indicated the ‘stretch in valuations is more broad-based than AI-related optimism’, with ‘fragilities in the financing arrangements around AI investment, which could amplify the impact of a shock’.
Bailey defended the timing. He described the capital changes as ‘targeted’ and ‘appropriate’, pushing back on the suggestion that easing rules while risks were rising was contradictory.
The FPC’s December 2025 record sets out the revised benchmark in full, alongside the committee’s broader stability assessment. The Bank is also planning a private markets system-wide exploratory scenario to test how firm behaviours in stress could interact and amplify shocks across the financial system.
The FPC’s April 2025 record confirmed a separate stability measure: shortening the UK securities settlement cycle to T+1, which the committee judged would reduce counterparty credit risk in financial markets. The next FPC meeting will be the first opportunity to assess how the reform package is received by the sector and whether the committee firms up its timeline for implementation.
