UK (Parliament Politics Magazine) – The Bank of England will ease bank capital rules to 13% to boost lending, after stress tests confirmed the UK’s major banks remain financially resilient.
As reported by The Guardian, for the first time in a decade, the Bank of England plans to relax capital rules for high street banks, scaling back regulatory protections introduced after the 2008 crisis.
The central bank has proposed cutting capital requirements on risk-weighted assets by one percentage point to roughly 13%. This move is intended to make it easier for banks to provide loans to consumers and companies.
What did the latest BoE stress tests reveal about UK banks’ resilience?
The Bank of England’s latest stress tests confirmed that major UK lenders, including Barclays, Lloyds, Nationwide, NatWest, Santander UK, and Standard Chartered, can sustain lending through a severe but plausible economic downturn.
The central bank said its planned new capital rules were
“consistent with its view that the banking sector can support long-term growth in the real economy in both current and adverse economic environments.”
According to the Bank, banks’ tendency to hold extra capital has meant less money is available for loans.
“Banks should have greater certainty and confidence in using their capital resources to lend to UK households and businesses,”
the Bank’s financial policy committee added.
Announcing the results alongside today’s Financial Stability Report, BoE stated,
“The results of the 2025 Bank Capital Stress Test demonstrate that the UK banking system is able to continue to support the economy even if economic and financial conditions turn out to be materially worse than expected. This underscores the role of financial stability as a pre-condition for sustainable growth.”
The Bank of England said it will review capital requirements in June, following its last assessment in 2019. It noted that since the previous capital review, banks have maintained mortgage and loan activity amid major economic shocks, including COVID and Russia’s full-scale invasion of Ukraine.
The central bank warned that soaring valuations of AI companies this year could trigger a sharp market correction.
It said,
“Equity valuations in the US are close to the most stretched they have been since the dotcom bubble, and in the UK since the global financial crisis. This heightens the risk of a sharp correction.”
The Bank’s Financial Policy Committee also warned about debt use in the AI sector and the complex web of multi-billion-dollar deals linking companies, noting,
“By some industry estimates, AI infrastructure spending over the next five years could exceed five trillion US dollars. While AI hyperscalers will continue to fund much of this from their operating cash flows, approximately half is expected to be financed externally, mostly through debt.”
It added,
“Deeper links between AI firms and credit markets, and increasing interconnections between those firms, mean that, should an asset price correction occur, losses on lending could increase financial stability risks.”
Concerns are growing that easing rules could leave UK banks vulnerable to collapse, as the government scales back post-2008 financial safeguards.
How did Rachel Reeves pressure banks to boost growth?
Chancellor Rachel Reeves calls on regulators to boost growth, warning that red tape acts as a “boot on businesses” and risks “choking off” UK innovation. Last week, she signaled support for lowering bank capital requirements.
In a letter to Bank of England Governor Andrew Bailey, published with the budget, Reeves praised the review of bank capital rules, stressing it must
“ensure the UK’s capital framework strikes the optimal balance to deliver resilience, growth and competitiveness.”
“The next steps in this work should identify actions that could support the supply of long-term capital for productive investment, particularly for high growth-potential firms seeking to scale up,”
the chancellor’s letter added.
UK banks will face pressure to boost the economy after narrowly avoiding higher taxes and emerging as major budget winners.
What did Karim Haji say about easing UK bank capital rules?
Karim Haji, KPMG’s global and UK financial services chief, praised the Bank of England’s move to ease capital rules for UK banks.
He said,
“UK Financial Services firms have proved resilient time and again both by regulatory stress tests and real life shocks. But global risks persist. The Financial Stability Report rightly points to continued structural risks from issues like cyber and the private client market.”
Mr Haji added,
“The past year has shown that risks aren’t confined to traditional economic shocks and when an event happens the impacts are felt immediately due to the interconnectedness of the financial system and technology.”
He continued,
“Regulations need to be robust but proportionate and UK banks have huge pools of capital. The recommendation to update the CET1 benchmark is a helpful step towards maintaining the UK’s resilience whilst also being supportive of growth.”
What are capital rules?
Capital rules require banks to hold a minimum amount of their own money (capital) to absorb unexpected losses without failing and protect customer deposits. Their primary goal is to ensure the banking system remains stable, which protects the broader economy and maintains public confidence in financial institutions.
The requirement is calculated as a percentage of a bank’s loans and other assets, which are adjusted for risk. This ensures banks have capital proportionate to the risk they take.
