FPC lowers bank capital benchmark to 13 percent
The Bank of England's Financial Policy Committee (FPC) has reduced its benchmark for system-wide Tier 1 capital requirements to 13 percent of risk-weighted assets. This updated assessment reflects the evolution of the financial system since 2015.
A new 13 percent benchmark
The FPC has updated its benchmark for system-wide Tier 1 capital requirements to around 13% of risk-weighted assets (RWAs), a 1 percentage point reduction from its 2015 assessment.
This comprises an 11% optimal level, inclusive of the neutral rate for the UK Countercyclical Capital Buffer (CCyB), and an additional 2 percentage points to account for outstanding gaps in RWA measurement.
The Committee's decision is consistent with the financial system's evolution, including a fall in banks' average risk weights, a reduction in the systemic importance of some banks, and improvements in risk measurement.
For instance, average risk weights have fallen by 7.5 percentage points since 2016.
The implementation of Basel 3.1 on 1 January 2027 is expected to further improve risk measurement, allowing the Prudential Regulation Authority (PRA) to reduce Pillar 2A minimum requirements by approximately 0.5 percentage points, aligning system-wide Tier 1 capital requirements with the FPC's updated 13% benchmark.
This inbuilt responsiveness reflects desirable flexibility in the capital framework.
Supporting the economy in good and bad times
A resilient financial system is vital for economic growth, with banks providing 85% of lending to UK households and nearly half to corporates.
Since 2015, the UK banking system has demonstrated its ability to support the real economy through significant macroeconomic shocks, including the Covid-19 pandemic and Russia's invasion of Ukraine.
This contrasts sharply with the deleveraging observed during the Global Financial Crisis.
The 2025 Bank Capital Stress Test confirms the system is sufficiently capitalised to continue lending even in severe stress scenarios.
Internationally, UK risk-based capital requirements for large banks are broadly similar to the euro area but appear lower than in the US, though higher for some specific aspects like leverage ratio requirements for large domestically focused banks.
The FPC considers this updated benchmark consistent with supporting long-term growth.
Pragmatic adjustment, not a paradigm shift
This 1 percentage point reduction in the FPC's capital benchmark is a pragmatic adjustment, reflecting genuine improvements in risk measurement and systemic resilience rather than a fundamental change in philosophy.
While offering banks greater certainty to deploy capital, the overall framework remains robust, ensuring stability without unduly hindering lending.
The move underscores the FPC's data-driven approach, balancing financial stability with economic growth objectives in a dynamic environment.