Key facts
- The Bank of England plans to relax capital requirements for major UK lenders.
- The reforms aim to make capital requirements more proportionate and effective.
- The Bank warned of increased financial stability risks due to AI capabilities and cyber vulnerabilities.
- The countercyclical leverage buffer will be cut as part of the simplification.
- The minimum capital requirement was reduced from 14% to 13%.
The Bank of England is planning to loosen capital requirements for major UK lenders, even as policymakers expressed concern about the threat to financial stability from rapid AI developments and debt-fuelled stock investments. The central bank said it is looking to remove and loosen some rules introduced after the 2008 financial crisis that determine the size of the financial cushion required to absorb losses.
The Bank’s Financial Policy Committee (FPC) said it plans to scrap a longstanding buffer within the leverage ratio, a move that would primarily benefit large domestic-focused banks and building societies. Current proposals could slash those lenders’ leverage ratio by 20 basis points on average, potentially spurring further lending that supports the wider UK economy. However, some committee members raised concerns that trimming these buffers could amplify current risks to the financial system, potentially increasing market-based leverage.
The FPC also raised concerns about rapid advances in frontier AI capabilities, which have increased financial stability risks related to cyber and operational resilience. Malicious actors could inflict shocks and outages at lower costs and at a greater scale, potentially hitting banks and systemically important financial firms. The FPC has reduced the minimum capital requirement for lenders from 14% to 13%.