The FPC outlined its assessment that the benchmark level for system-wide Tier 1 requirements is now 100bp lower, at 13%, translating to an indicative common equity Tier 1 (CET1) requirement of around 11%, down from 12% currently. The implementation of Basel III endgame rules in January 2027 will therefore allow the PRA to reduce the Pillar 2A requirement by around 50bp. The FPC also plans to review the leverage ratio requirements in the UK, as falling average risk weights have made the leverage ratio more binding.
The potential easing reflects the FPC’s view that the sector is more resilient than at its last assessment, with banks having adopted more conservative underwriting standards, stronger risk-management frameworks and higher-quality asset portfolios. Reducing the overall capital that banks are required to hold would potentially free up billions of pounds for deployment, or lead to continued buybacks and dividends. The changes reflect a regulatory focus on balancing financial stability with economic growth objectives.
A reduction in the capital buffers available to absorb unexpected losses during stress periods, could, however, become ratings relevant. Our assessment of banks’ capitalisation and leverage could be affected if institutions operate closer to minimum requirements or if regulatory minima themselves are significantly lowered. Lower capital ratios accompanied by faster loan growth and a higher risk appetite would be particularly credit negative. However, any rating impact would ultimately depend on management actions.
The stress test results validate UK banks’ improved resilience, as all participating banks remained above their minimum capital requirements. UK banks would collectively maintain a CET1 ratio of around 10.2% (before management actions) even after absorbing significant losses under a severe scenario featuring UK unemployment rising to 8.5%, house prices falling about 30% and commercial real estate values declining sharply.
The stress test had the lowest impact on the CET1 ratios of NatWest, Lloyds and HSBC before management actions. This reflects business model diversification and earnings quality, factors that underpin these banks’ higher ‘A+’ ratings. Standard Chartered, Nationwide and Barclays were the most affected during the stress test due to their higher-risk international and consumer lending, markets activities (at Standard Chartered and Barclays) and concentration in UK housing loans (Nationwide). Nationwide’s low-point CET1 ratio was the highest after the stress test and maintained the largest buffer in the peer group due to its very high starting point.
The 14.4% average CET1 ratio at end-September for the seven major UK banks provides a meaningful cushion against minimum requirements. The ratio is roughly in line with the European average (of those banks included in Fitch’s Quarterly Credit Monitor) and therefore any significant decrease from these levels could weaken rating relativities.
The Bank of England highlighted the uncertain implications of UK banks’ estimated GBP173 billion banking book exposures to private market funds and corporates backed by financial sponsors, equivalent to 67% of aggregate CET1 capital. It warned that, while private markets have been resilient so far, the ecosystem has grown rapidly since the global financial crisis and has not been tested through a broad-based macroeconomic stress at its current size. Limited data on underlying investors and collateral has prompted the Bank of England to explore these risks through its upcoming system-wide exploratory scenario on private markets’ resilience.
Contacts:
Huseyin Sevinc
Senior Director, Financial Institutions – Banks
+44 20 3530 1027
huseyin.sevinc@fitchratings.com
Fitch Ratings Limited
30 North Colonnade
London E14 5GN
Maria Shishkina
Director, Financial Institutions – Banks
+44 20 3530 1379
maria.shishkina@fitchratings.com
Christian Scarafia
Managing Director – Banks
+44 20 3530 1012
christian.scarafia@fitchratings.com
Mark Brown
Senior Director, Risk
Credit Commentary and Research
+44 20 3530 1588
mark.brown@fitchratings.com
Media Relations: Matthew Pearson, London, Tel: +44 20 3530 2682, Email: matthew.pearson@thefitchgroup.com
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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