The objective of the Financial Policy Committee of the Bank of England is to contribute to financial stability and support UK economic policies, including growth and employment.
In its latest report, the FPC highlighted:
The increasing risks to financial stability, essentially because of material uncertainty in the global macroeconomic outlook as a result of geopolitical tensions, fragmentation of trade and financial markets, risky asset valuations, and pressure on sovereign debt markets.The resilience of the UK banking system as demonstrated by the newly published results of the 2025 Bank Capital Stress Test, which assumed a severe global supply shock, deep global recession, and rising inflation.The wisdom of reducing the key benchmark for the capital requirements of UK banks.
In this commentary, we focus on the FPC’s changes to the key benchmark for capital requirements.
Lower Tier 1 Capital Requirement Affirms A Decade Of Progress
The FPC first assessed the appropriate level of capital requirements for the UK banking system in 2015 and reaffirmed them in 2019. The reduction in the key benchmark for the capital requirements of UK banks announced this week resulted from the FPC revisiting its assessment of capital requirements and considering the experience of the past 10 years, as well as the results of the 2025 Bank Capital Stress Test.
The FPC concluded that the UK banking system is both resilient and able to support growth. In other words, even if economic and financial conditions were to deteriorate significantly, the UK banking system would still be able to support growth. As a result, the benchmark for the system-wide Tier 1 capital requirements was reduced to around 13% of risk-weighted assets (RWAs), down from the previous benchmark of around 14%. The new benchmark is equivalent to a CET1 ratio of around 11%. This reduction will take place when Basel 3.1 is implemented on Jan. 1, 2027.
The FPC highlighted that, in its assessment of capital requirements, the following elements have changed: RWAs are lower on average, reflecting the evolution of UK banks’ balance sheet mix; the systemic importance of some UK banks has been reduced; and risk measurement has improved, particularly when Basel 3.1 is applied.
The CET1 ratio for the large UK banks—HSBC, Lloyds Banking Group, NatWest, and Barclays—was 14.2% on average at the end of the first nine months of 2025, unchanged compared with same period of 2024. These banks are all maintaining some capital cushion above regulatory requirements.
Often, the large UK banks plan for some room to grow the business while meeting current—and potential future—regulatory requirements. Management at the large UK banks generally views capital cushions that are not required by regulatory authorities as a tool for managing risks and earnings distributions to shareholders. According to the FPC, currently, the UK banks in aggregate had CET1 capital resources of about 2% of RWAs over their requirements although this headroom varies across banks.
Improving The Usability Of Regulatory Capital
However, the FPC reminded stakeholders that regulatory buffers were explicitly intended to help banks absorb losses in times of stress while continuing to serve the economy. In particular, the UK Countercyclical Buffer (CCyB) guarantees that the UK banking system can absorb severe but plausible shocks without any unnecessary restriction on essential banking services (including lending) to the UK economy.
In the FPC’s review, the UK CCyB was maintained at 2%. While the global risk environment remains elevated, UK household and corporate aggregate indebtedness was assessed as low. UK banks currently have strong asset quality and robust capital positions, which should help them to absorb risks on the horizon.
Further FPC work will include a review of the usability of regulatory capital buffers for the banks.
Different Regulatory Frameworks Capture Risks Differently
There are differences in how risks are captured across different regulatory frameworks, and that was a consideration for the FPC reviewing the level of capital requirements in the UK.
While it is a challenging task, we note the FPC concluded that the level of risk-based capital requirement for large banks in the UK was broadly similar to that of banks in the euro area, and lower than that of banks in the US. At the same time, the UK capital requirements appeared to be higher than those in other jurisdictions for some more specific aspects, such as the leverage ratio requirements for large domestically focused banks. As a result, the FPC will review the UK leverage ratio, which was introduced in 2015 as a complement to the risk-weighted framework.
Capital Requirements Are Complementary To Other Lines Of Defense
The measurement of capital is a key element of a bank’s creditworthiness, but, in our view, it must be considered alongside other factors. In our view, business mix, governance standards, capacity to generate recurring earnings, risk appetite, funding mix, and access to liquidity are a few additional important considerations for individual banks.
Meanwhile, measures undertaken in the wake of the global financial crisis, such as resolution plans and ring fencing, which were implemented to improve the banking system’s resilience to withstand such a crisis (including protecting depositors), remain in place. The FPC reaffirmed that these postcrisis reforms remained appropriate.
Overall, the reduction by 1% of the benchmark for the system-wide Tier 1 capital requirements does not affect our credit ratings on UK banks. The large UK banks are currently targeting CET1 ratios at 13% or more, and it is unclear at this point in time whether the banks will lower their capital targets.
We note that lending volume increased across our rated large UK banks in the first nine months 2025, up about 4% year over year, on average. This was in part driven by higher mortgage balances in the retail business lines thanks to the loosening of affordability tests and minimum loan to value as recommended this year by the UK regulatory banking authorities. Given the banks’ solid capacity to generate earnings, lower targets could further support higher risk-weighted assets but also more room to distribute earnings to shareholders, all things being equal.
This is a version of a Morningstar DBRS report on the Bank of England stress tests. Vitaline Yeterian and Marcos Alvarez were the analysts on the report.
Any rating actions are those of Morningstar DBRS and not its parent Morningstar, Inc. In the case of deviation, the wording of the original DBRS report always prevails.
The author or authors do not own shares in any securities mentioned in this article. Find out about
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