BoE Loosens Capital Rules

The Bank of England has taken a significant step towards easing post-crisis regulation by lowering its estimate of the capital that UK banks need to hold. The decision follows strong stress test results and marks the first notable softening of requirements since the global financial crisis.

The Financial Policy Committee, chaired by governor Andrew Bailey, said its benchmark for tier one capital had been reduced from 14 per cent to 13 per cent. The move comes at a time when ministers are pressing for measures that could help channel more finance into the real economy. It also reflects the Bank’s view that the system is strong enough to withstand severe shocks while still supporting lending.

Officials framed the shift as a recalibration rather than a reversal. Bailey told reporters that financial stability remained a precondition for growth and that the changes were consistent with that objective. The Bank’s central message was that lenders should now feel more confident using their capital buffers to support households and businesses, particularly as the government seeks to revive an economy that expanded only 0.1 per cent in the last quarter.

The Labour government has been urging regulators to take steps that could improve the flow of credit to high growth companies. Chancellor Rachel Reeves has made faster economic expansion a priority after the country’s extended period of low productivity and sluggish investment. City minister Lucy Rigby said banks should no longer be treated as if they were still dealing with the immediate aftermath of the 2008 crisis, welcoming what she described as a more up to date narrative about the sector.

The Bank carried out a detailed review of capital requirements to assess whether the existing framework struck the right balance between resilience and growth. The FPC concluded that the costs of maintaining higher capital levels had risen as the economy faced slower output, weak business investment and tighter financial conditions. At the same time, the benefits of additional capital had become less pronounced, given the scale of resources already held across the system.

The decision was underpinned by the results of the latest stress tests. Regulators modelled an adverse scenario involving a sharp rise in unemployment, a severe fall in house prices, a period of elevated inflation, higher interest rates and a five per cent contraction in GDP. Even under these conditions, the largest UK banks would retain around £60 billion of capital above their minimum requirements. The Bank said this resilience showed that lenders would have the capacity to continue serving creditworthy customers during a crisis.

Shares across the UK banking sector moved higher after the announcement, with Barclays, NatWest and Lloyds rising more than 1 per cent and HSBC gaining nearly 1 per cent. Analysts noted that the broad contours of the decision had been expected, but the formal lowering of the benchmark added clarity for management teams and investors who have been waiting for signs of policy direction.

In explaining its approach, the FPC said it had revisited capital standards from the perspective of their impact on growth. It highlighted that UK risk-based capital requirements were similar to those in the Eurozone and lower than those in the United States once differences in risk measurement were taken into account. The committee also noted that the UK had stricter leverage ratio rules compared with the EU and US and said it would review these as part of a wider assessment.

The Bank’s updated framework will take effect in January 2027 when new Basel rules are introduced. Although the FPC judged that the underlying optimal level of tier one capital was 11 per cent, it added two percentage points to reflect shortcomings in how banks assess the riskiness of their assets. This adjustment is intended to ensure that resilience is not compromised as the regulatory landscape evolves.

The shift arrives at a delicate point for the UK economy. While inflation has eased, growth remains weak and business confidence fragile. The government has been vocal about the need to improve access to capital for innovative companies and to encourage banks to expand their support for small and medium sized enterprises. Ministers hope that a more flexible capital regime could lead to increased lending in sectors viewed as vital to productivity and regional development.

There is, however, no guarantee that banks will use the additional flexibility to boost credit. Some analysts expect management teams to take a cautious approach, particularly in a market where interest rates remain elevated and borrowers face rising costs. Others note that lenders may choose to return surplus capital to shareholders through dividends and buybacks, though Bailey said the relationship between lending and shareholder returns was two way and that supporting the economy would strengthen the banks themselves.

The broader financial context also influenced the decision. The FPC has repeatedly warned about stretched valuations in assets linked to the artificial intelligence boom. The committee said these valuations increased the risk of a sharp correction that could spill into the wider system. While the Bank believes UK banks are robust enough to absorb such shocks, it remains concerned about the potential for global market volatility to test risk models and capital plans.

Banks are also monitoring developments in the United States, where regulators have begun easing constraints on the country’s largest lenders. Since the Federal Reserve announced plans to roll back elements of the post-crisis rulebook, British banks have warned of a growing competitive gap. They argue that stronger US earnings capacity, combined with lighter regulation, could put them at a disadvantage unless UK standards are adjusted.

The FPC’s move will not remove that gap entirely, but it will narrow the differential at a time when British lenders are keen to attract international investors and strengthen their market valuations. The committee’s decision also aligns the UK more closely with the risk based frameworks used in Europe, which may support cross border comparability and reduce complexity for multinational groups.

Although the easing has been welcomed by banks, it does not signal a wholesale shift in regulatory philosophy. The Bank continues to hold the view that strong capital levels are essential to maintaining confidence and protecting taxpayers. The FPC emphasised that the framework would remain subject to regular scrutiny and that adjustments would be made if risks increased.

For now, the decision offers lenders a clearer path and removes some of the uncertainty that has surrounded capital planning for the past several years. It also gives the government a policy shift that supports its growth agenda without undermining financial stability.

How banks respond will determine whether the move delivers the economic benefits ministers hope for. The next two years will show whether a more flexible capital regime leads to stronger credit flows or whether lenders choose to hold their buffers as insurance against an uncertain outlook.