The Bank of England has done something it hasn't dared since the global financial crisis of 2008: it's loosened the regulatory reins on Britain’s biggest banks. After years of post-crisis belt-tightening, a new review has found that banks can get by with less capital in reserve: a nod, perhaps, to the Labour government’s drumbeat call for growth. But is this shift a smart recalibration or a risky roll of the dice?
Banking on a lighter touch
For nearly a decade, UK lenders were required to hold Tier 1 capital equivalent to 14% of their risk-weighted assets. This was the baseline designed in the aftermath of the 2008 disaster, intended to shield the financial system from future storms. Now, the Bank of England’s Financial Policy Committee (FPC) has trimmed that benchmark to 13%. It may not sound dramatic, but in financial terms, it frees up billions of pounds for potential lending.
The rationale? Banks are, in the Bank’s own words, "sufficiently well capitalised" to weather a severe downturn, even one that involves a 5% economic contraction, a 28% housing price crash, and interest rates spiking to 8%. These stress test scenarios - designed to be implausible but not impossible - were handily passed by all seven major lenders, including HSBC, Barclays, Lloyds, and NatWest.
This newfound confidence isn’t just regulatory posturing. It reflects real shifts in bank behaviour. Since 2016, average risk weights have fallen sharply, driven by safer lending practices and reduced systemic exposure. Banks are taking fewer wild bets and being rewarded with more leeway.
The politics of prudence
This move also dovetails neatly with the political climate. Keir Starmer’s Labour government, facing anaemic growth and stagnant productivity, has urged regulators to prioritise economic expansion alongside stability. Loosening capital requirements allows banks to lend more, fuelling households and businesses that are hungry for credit.
The BoE is at pains to point out that the new benchmark still sits at the lower end of estimates for optimal capital levels. Academic studies reviewed by the Bank suggest that significantly lower thresholds could damage long-term GDP by making the system too fragile to withstand shocks. And much of the capital buffer remains intact, including layers designed to absorb geographic and sector-specific risks.
Across the Atlantic, Donald Trump’s administration is moving in a similar direction. U.S. regulators are expected to ease capital rules for big banks, fuelling fears of a global race to the bottom. In Europe, meanwhile, the EU is refining its prudential framework to simplify capital rules. British bankers have been quick to warn that without keeping pace, UK banks risk being crowded out on the world stage.
Will this change actually lead to a lending boom? Here, things get murky. While capital headroom theoretically gives banks room to grow, evidence suggests many are reluctant to deploy it. In the past, banks have been loath to dip into capital buffers during downturns, fearing regulatory backlash or market panic. The FPC acknowledges as much and has promised to improve "buffer usability" so that banks feel confident extending credit when it’s needed most.
Moreover, not all banks are created equal. While Nationwide emerged from the stress tests as the most resilient, Barclays and Standard Chartered had thinner cushions. And the leverage ratio is now binding for three of the seven major banks. That suggests some lenders are already operating close to their regulatory limits.
So, while the FPC’s move gives banks a bit more wiggle room, whether they use it to energise the economy or pad their profits is far from certain. Recent years have seen strong earnings and rising dividends - some £90 billion returned to shareholders over the past three years - suggesting that banks are hardly starved for capital, but not necessarily inclined to lend with abandon.
