UK Finance Response to FPC’s Assessment of Bank Capital Requirements
Bank of England
The industry's formal response to the FPC's December 2025 landmark capital review: what UK Finance supported, what it wants to go further, and why the leverage framework is the outstanding issue.
Context:
UK Finance submitted a formal response to the Bank of England Financial Policy Committee's Financial Stability in Focus (FSIF), 'The FPC's Assessment of Bank Capital Requirements' with the feedback deadline of 2 April 2026. The FSIF, published alongside the December 2025 Financial Stability Report, represented the most significant reassessment of UK bank capital requirements since the FPC's 2015 benchmark-setting exercise.
The FPC's assessment concluded that the appropriate benchmark for system-wide Tier 1 capital requirements is now 1 percentage point lower, around 13% of risk-weighted assets (equivalent to a CET1 ratio of approximately 11%), compared to the previous benchmark of approximately 14%. This reduction reflects a reassessment of the costs and benefits of capital in light of: the maturity of post-crisis reforms (Basel 3.1 finalisation, stress test refinement); evidence on capital's impact on economic growth; and changes in the banking sector since 2015, including improved risk management and the transition from LIBOR.
The assessment was accompanied by specific areas for further work: the usability of capital buffers (particularly whether the CCyB and other buffers can be effectively used during stress); the leverage framework (specifically whether the leverage ratio creates binding constraints at the wrong times); and the approach to threshold indexation (inflation-adjusting regulatory thresholds over time). The FPC held a structured evidence-gathering event on 20 March 2026 and confirmed that the July 2026 Financial Stability Report will provide the next steps.
Rules and Guidelines:
The capital assessment is not a direct rule change; it is an FPC reassessment of the appropriate calibration of existing requirements. The practical regulatory levers are: the countercyclical capital buffer (CCyB), currently set at 2% and unchanged; the leverage ratio (at 3.25% minimum); the PRA's Pillar 2A and Pillar 2B capital add-ons, which are firm-specific; and the stress test design, which the Bank has moved from annual to biennial.
The FPC committed to further consultation in 2026 on: (i) threshold indexation, a methodology for automatically adjusting regulatory monetary thresholds (for example, in the SMCR and large exposures regime) for inflation; (ii) changes to buffer frameworks and leverage constraints, where the FPC is examining whether current calibration discourages banks from using buffers in stress; and (iii) potential changes to how the stress test interacts with IFRS 9 provisions, where the FPC has already made targeted adjustments.
Businesses Affected:
UK Finance strongly supported the 1pp reduction in the capital benchmark as recognition of the maturity of post-crisis reforms and the need to ensure that capital requirements do not unnecessarily constrain banks' ability to support economic growth.
On buffer usability: UK Finance pressed for the FPC to address the persistent concern that, in practice, banks are unwilling to draw on their CCyB buffers during stress for fear of supervisory and market perception consequences. The industry argued that without changes to the supervisory communication framework, confirming that buffer use in stress is expected and acceptable, the effective minimum capital level is permanently elevated above the stated minimum, defeating the purpose of a counter-cyclical buffer.
On the leverage framework: UK Finance raised concerns that the leverage ratio creates binding constraints for certain business models (particularly in repo, securities financing, and sovereign debt market-making) that are not justified by risk, and called for targeted relief or refinement that preserves the leverage ratio's macro-prudential purpose while removing distortions in specific market segments.
On threshold indexation: UK Finance supported the principle of inflation-adjusted thresholds to prevent creeping regulatory tightening through inflation, but asked for clear consultation on the methodology before implementation.
Next Steps:
Banks of all sizes: capital planning assumptions should reflect the revised benchmark, with the caveat that firm-specific Pillar 2A requirements remain unchanged pending firm-level supervisory dialogue.
Treasury and capital management teams: engage with the FPC's buffer usability review; the outcome will affect capital distribution policies, dividend strategies, and the design of recovery plans.
Market-making and repo desks: engage with the leverage framework review any changes to leverage ratio calibration for low-risk exposures, which could materially affect the economics of certain wholesale market activities.
CFOs and board risk committees: update internal capital adequacy frameworks to reflect the 1pp benchmark reduction and to model the range of outcomes from the buffer, leverage, and threshold consultations expected in 2026.
Source | UK Finance | Bank Capital Requirements
