Following successful stress tests, the Financial Policy Committee (FPC) lowered the benchmark for tier one capital – the buffer used to absorb losses – from 14% to 13%.

The decision follows a review of the banking sector’s resilience. Regulators tested major UK banks against a severe crisis scenario involving a doubling of unemployment, a housing market crash, and a 5% contraction in GDP. The BoE concluded that even under these conditions, banks would hold £60bn of capital above minimum requirements, ensuring they retain the capacity to lend to creditworthy households and businesses.

The move aligns with pressure from the Labour government to kick-start the economy, which grew by only 0.1% in the last quarter. Chancellor Rachel Reeves has urged regulators to support high-growth companies, while City Minister Lucy Rigby stated it was time to move past the narrative of the 2008 crisis and stop keeping banks on the “naughty step”.

Governor Andrew Bailey maintained that while financial stability remains a precondition for growth, the reduction is “sensible” and should give lenders greater certainty.

The BoE acknowledged that while UK risk-based requirements are similar to the Eurozone, its leverage ratio rules remain stricter than those in the US and EU. With US authorities currently rolling back regulations, the FPC has committed to reviewing these disparities to ensure UK banks do not lose ground to Wall Street rivals.

The new capital levels will formally take effect in January 2027, coinciding with the implementation of global Basel standards.

Responding to the Bank of England’s capital announcement, David Postings, chief executive of UK Finance, said: “We welcome today’s announcement lowering bank capital requirements and committing to review the leverage ratio and buffers.

“Capital is essential for resilience, but these reviews will need to be enacted quickly to lower the actual requirements to help unlock lending and growth across the economy and make UK banks more competitive.”

Shares in major lenders, including Barclays, HSBC, NatWest, and Lloyds, rose by over 1% following the announcement. However, the BoE tempered the positive news with a warning regarding the “materially stretched” valuations of companies tied to the artificial intelligence boom, flagging the risk of a market correction.