FPC lowers UK bank capital benchmark to 13 percent
The Bank of England's Financial Policy Committee has lowered its benchmark for system-wide Tier 1 capital requirements to 13 percent of risk-weighted assets. This adjustment, down from 14 percent, reflects an updated assessment of costs and benefits to growth.
FPC revises capital benchmark to 13 percent
The Financial Policy Committee (FPC) has reduced its benchmark for system-wide Tier 1 capital requirements to approximately 13 percent of risk-weighted assets (RWAs), down from 14 percent.
This revised benchmark comprises an 11 percent optimal level, including the neutral rate for the UK Countercyclical Capital Buffer (CCyB), and an additional 2 percentage points to account for RWA measurement gaps.
The FPC's decision reflects significant changes since its 2015 assessment.
Banks' average risk weights have decreased by 7.5 percentage points since 2016, implying the former 14 percent benchmark would now require about £60 billion less nominal capital.
Systemic buffers are also lower due to a reduction in the systemic importance of some banks.
Furthermore, the FPC anticipates that Basel 3.1 implementation on January 1, 2027, will enhance risk measurement, allowing the Prudential Regulation Authority (PRA) to reduce Pillar 2A minimum requirements by around 0.5 percentage points.
This aligns with the new 13 percent benchmark, showcasing the capital framework's desirable flexibility in adapting to evolving risk levels and improved measurement.
Banking system supports real economy
A resilient financial system is crucial for UK economic growth and stability.
Banks are vital, underpinning services and providing significant lending to households and businesses.
The FPC aims to ensure appropriate capitalization for sustainable long-term growth.
Since 2015, UK banks have demonstrated resilience, supporting the economy through shocks like Covid and the Russia-Ukraine conflict, a contrast to the Global Financial Crisis.
The 2025 Bank Capital Stress Test confirms their ability to lend under severe stress.
UK capital requirements are broadly similar to the euro area and lower than the US, but higher for specific aspects, such as leverage ratios for large domestically focused banks.
The FPC welcomes feedback on its cross-jurisdictional comparison.
Balancing resilience and growth
The FPC's decision to lower the capital benchmark signals a mature post-crisis regulatory environment, balancing resilience with economic growth incentives.
It provides banks greater certainty to deploy capital for lending, potentially boosting UK economic activity.
However, the continued need for a 2 percent buffer for RWA shortcomings highlights persistent measurement challenges in risk assessment.