The Bank of England's Financial Policy Committee on Tuesday set out plans to ease key capital requirements for major UK lenders, proposing to soften the leverage ratio and enhance the usability of capital buffers, even as the central bank's July 2026 Financial Stability Report flagged a rise in threats to financial stability from artificial intelligence, geopolitical tensions and growing leverage in equity markets.
The FPC said it would soften the impact of the leverage ratio — which requires lenders to hold a minimum ratio of capital against total assets — and announced work to enhance the usability of capital buffers so they can be more easily released without automatically restricting payouts to shareholders. The committee indicated that a new capital buffer framework would reduce leverage requirements on large domestic-focused UK banks by around 20 basis points, though it noted the reduction would vary by bank. The BoE said the leverage ratio has become binding for three out of seven major British banks and caused them to have higher obligations than international peers. The buffer usability work would affect only large, domestically focused institutions — including Lloyds Banking Group (LLOY.L), NatWest Group (NWG.L) and Santander UK — as rules for internationally active banks are set by Basel. The full package will be subject to public consultation later in the year, and banks will be given multiple years to rebuild buffers.
Some members of the FPC expressed concern that the proposed changes might lead to an unwanted increase in market-based leverage with implications for the resilience of core UK markets. The Association for Financial Markets in Europe, which represents large banks, welcomed the proposals. 'The leverage ratio framework incorporates significant gold-plating and has become increasingly binding,' said Jeanie Watson, AFME director for capital and risk management [Source: Reuters]. The FPC also said it sees a clear case for a single releasable buffer to reduce complexity and further enhance usability, but noted this could only be achieved with international support.
At the same time, the BoE's Financial Stability Report found that risks to stability have increased in 2026, while stressing that UK lenders and consumers remain resilient. The Bank said progress in AI technology presents a significant increase in the risks to financial stability from cyber and operational vulnerabilities, and that frontier AI models are increasingly capable of exploiting software vulnerabilities and could increase the sophistication and impact of cyber attacks on firms including banks and market infrastructure [Source: Bank of England]. The report also highlighted growing risks from increased borrowing to finance share purchases and from the extent to which investors and lenders are exposed to AI and technology companies, whose share prices have shot higher amid increased demand to invest in the sector and positive earnings news.
Tuesday's announcement follows a series of regulatory steps to recalibrate post-crisis capital rules. In December, the FPC lowered its recommended system-wide Tier 1 capital benchmark for UK banks from around 14% to 13% of risk-weighted assets — the first such move since the financial crisis of the late 2000s — and initiated the review into the leverage ratio and buffers. The FPC's review also follows a relaxation of US leverage requirements in November. The leverage restrictions were originally introduced as a backstop to risk-weighted capital requirements following the 2008 financial crisis, but the FPC launched its review last year amid industry concerns that the restrictions had become too tight. The UK countercyclical capital buffer rate has been maintained at 2%.
Sources: Bloomberg, The Guardian, Sky News, Reuters, Bank of England, Addleshaw Goddard