On 2 December 2025, the Bank of England’s Financial Policy Committee published its December Financial Stability Report, as well as a report entitled ‘Financial Stability in Focus: The FPC’s assessment of bank capital requirements’ (the ‘Reports’). The FPC has lowered its recommended system-wide Tier 1 capital benchmark for UK banks from around 14% to 13% of risk-weighted assets, translating to a Common Equity Tier 1 (CET1) ratio of about 11%. This move reflects stronger bank balance sheets, improved risk measurement, and the reduced systemic importance of some institutions, as well as the upcoming Basel 3.1 reforms. The FPC’s updated benchmark aims to strike a better balance between financial stability and supporting economic growth, while still ensuring banks remain resilient to shocks.
The FPC’s decision is underpinned by evidence that UK banks are well-capitalised, with significant headroom above regulatory minima, and that the sector has become more robust since the global financial crisis. However, the FPC has retained a 2 percentage point buffer to cover ongoing gaps in risk measurement. The FPC has also signalled a focus on making capital buffers more usable in times of stress and reviewing leverage ratio requirements as risk weights fall.
For banks, the new benchmark offers greater clarity and flexibility in capital planning and lending, but the FPC remains cautious: any further reductions in capital requirements will depend on continued improvements in risk measurement and regulatory frameworks. The FPC’s approach signals a more responsive and proportionate regulatory environment, but banks should expect ongoing supervisory scrutiny and be prepared to demonstrate how they would use capital buffers in a downturn.
The FPC
The Bank of England’s Financial Policy Committee (FPC) plays a pivotal role in safeguarding the resilience of the UK financial system. Its primary responsibility is to identify, monitor, and address systemic risks, ensuring the financial sector can absorb rather than amplify shocks. Its judgements inform Prudential Regulation Authority (PRA) policy, firm capital-planning expectations, and public regulatory messaging. It also has a secondary objective, to support the government’s economic policy, including growth, employment, sustainable investment, and the broader economic contribution of the financial services sector.
A key area of focus for the FPC has been setting appropriate bank capital requirements. The FPC’s system-wide benchmark is an economy-wide ‘reference point’ used to guide expectations about aggregate Tier 1 capital needs. The benchmark – and any associated adjustments - is not immediately a binding rule, but strongly shapes PRA Pillar 2 decisions, buffer calibration, supervisory dialogue, and market expectations.
Previous assessments
2015
In 2015, the FPC first established a benchmark for system-wide Tier 1 capital requirements at around 14% of risk-weighted assets (RWAs), reflecting a balance between the macroeconomic costs and benefits of higher capital. The assessment was based on an analysis of the level of capital that would maximise long-term growth in the UK economy.
2019
This benchmark was reaffirmed in 2019, with the FPC emphasising the importance of post-crisis reforms (including a statutory resolution regime), effective supervision, and the active use of the countercyclical capital buffer (CCyB). In addition, large banks have successfully established and increased their minimum requirement for own funds and eligible liabilities (MREL), which allows for additional loss absorbency capacity around twice their minimum capital requirements. The FPC also assessed that the level of the UK CcyB, increased from 1% to 2%, was likely to have improved its strategy of varying regulatory capital buffers in response to the financial cycle. The higher neutral rate allowed for the release of the CcyB to support lending when shocks materialised, and ensured appropriate capitalisation for risks at the peak of the financial cycle.
2025 report
The December 2025 Financial Stability Report marks a significant update in the FPC’s assessment, as follows:
1. Benchmark change: The FPC has now reduced its benchmark for system-wide Tier 1 capital requirements to 13% of RWAs, equivalent to a Common Equity Tier 1 (CET1) ratio of around 11%. This adjustment is underpinned by a fall in banks’ average risk weights, reduced systemic importance of some institutions, and improvements in risk measurement, including the forthcoming Basel 3.1 implementation.
2. Recalibration: The FPC explains the 13% as an underlying optimal level of the 11% (inclusive of the neutral UK CcyB), plus about 2 percentage points to reflect ‘outstanding gaps and shortcomings’ in RWA measurement that Pillar 2A currently captures. The FPC’s analysis indicates that this level remains within the range likely to maximise long-term macroeconomic net benefits, with materially lower requirements posing risks to GDP and financial stability.
Drivers identified for the changes
Section 4 of the Financial Stability Report outlines the capital and liquidity positions of UK banks, noting that Common Equity Tier 1 (CET1) ratios and liquidity coverage ratios have been maintained at levels consistent with those established following the implementation of the post-global financial crisis bank capital framework. The 2025 Bank Capital Stress Test, the results of which are presented in Section 5 of the Financial Stability Report, further evidences the resilience of the sector. Under the stress scenario, the aggregate CET1 ratio declines from an initial 14.5% to a low point of 11.0%, which remains comfortably above applicable regulatory minimum requirements and systemic risk buffers.
The Financial Stability Report notes that the FPC and PRA do not require firms to maintain buffers above regulatory minima, and most of the headroom observed is due to banks starting with significant capital in excess of requirements. Banks’ balance sheet composition has shifted, and this has reduced nominal capital needs on current balance sheets. In addition, some banks have declined in systemic importance, which lowers the system-wide buffer overlays that the FPC would otherwise require.
Box D of the Financial Stability Report provides an in-depth review of the FPC’s capital assessment process, noting that the reduction in the benchmark should give banks greater certainty and confidence to use their capital resources to support lending. The FPC also addresses the usability of regulatory buffers, the leverage ratio framework, and the need to ensure that capital requirements remain effective, efficient, and proportionate.
Looking ahead, the FPC is committed to enhancing the usability of capital buffers, as banks appear to be reluctant to draw upon capital buffers in times of stress. In addition, the FPC intends to review the implementation of the leverage ratio calibration; falls in banks’ average risk weights could make the leverage ratio binding for more banks. The FPC’s approach signals a willingness to adapt regulatory requirements in light of evolving risks and structural changes in the financial system, while maintaining a strong foundation for the sector’s resilience and growth.
For banking sector clients, these developments suggest a regulatory environment that is both robust and increasingly responsive to industry feedback and market evolution. The reduction in capital benchmarks and focus on buffer usability may offer greater flexibility for banks in capital management and lending, but the FPC remains vigilant to emerging risks and is actively seeking input from stakeholders on future refinements to the capital framework.
Practical considerations
- Capital planning: The revised benchmark gives firms an improved headline background to justify deploying excess capital to support lending and business strategies. Aggregately, UK banks already have modest headroom (aggregate CET1 c.2% above requirements), but that headroom varies by bank.
- PRA supervisory calibration: We may well expect the PRA to:
- (a) update Pillar 2A assessments over the coming supervisory cycles in light of both the FPC judgement and Basel 3.1; and
- (b) refine guidance on buffer usability.
Banks should anticipate targeted supervisory dialogue about how they would use buffers in stress and whether leverage ratios will bite under new RWA profiles.
- Leverage ratio interactions: As RWAs fall, the leverage ratio could become the constraining capital requirement for a larger set of firms. Firms whose business models rely heavily on low risk-weight assets should model potential leverage ratio constraints now.
- Market and shareholder expectations: Market reaction has been positive; shares in major UK banks rose after the announcement. Boards and investor relations teams will need to reconcile improved distributable capacity with continuing prudential and reputational expectations (e.g. avoiding perceptions that capital buffers are being used primarily to boost dividends at the expense of resilience).
- Usability of buffers: Unless changes materialise quickly, reluctance to dip into buffers in stress will persist, limiting the practical benefit of lowering headline benchmarks. The FPC has signalled a workstream here, but details and legal or operational changes (such as, how distributions and buffers are treated in resolution), remain to be clarified.
- Model / RWA risk: The FPC continues to treat RWA measurement gaps as materials, hence the persistent 2 percentage point ‘cover’ in the benchmark. It may be that banks using internal models expect continued PRA challenge and possible Pillar 2 add-ons, until model governance and calibration questions are fully resolved.
- Interaction with other jurisdictions: Comparative measures differ materially across the UK, EU and U.S. Cross-border groups must manage potentially divergent capital outcomes, and reporting / intragroup funding implications.
Following these Reports, it is expected that there will be follow-up discussions with the Prudential Regulation Authority (PRA) regarding the calibration of Pillar 2A and the issuance of consultations or supervisory statements on buffer usability. Between 2026 and 1 January 2027, there will be an implementation window for the Basel 3.1 elements referenced by the FPC, during which the PRA will be responsible for translating international standards into domestic supervisory expectations. During this period, firms should closely monitor PRA technical consultations and supervisory statements.
On an ongoing basis, biennial stress testing and supervisory assessments will continue to inform the calibration of capital buffers, while market and political scrutiny of the balance between growth and resilience is expected to remain high.
