The Bank of England has set out plans for the most significant relaxation of regulations for lenders since the 2008 global financial crisis, aiming to stimulate the economy by freeing up billions of pounds for potential loans.
A Major Regulatory Shift
In a pivotal move, the Bank's Financial Policy Committee (FPC) has proposed reducing the capital reserves that banks are mandated to hold as a safety net against potential losses. This buffer, known as the UK countercyclical capital buffer, will be lowered from around 14% to approximately 13% of their risk-weighted assets.
The core intention is to encourage banks to increase lending to both households and businesses, providing a much-needed boost to economic growth. These stringent rules were originally implemented in the aftermath of the 2008 crash to curb excessive risk-taking and prevent bank failures.
Warnings Amidst the Windfall
This regulatory loosening was announced alongside a stark warning from the central bank about mounting risks in global financial markets. Officials expressed concern over a potential "sharp correction" in the valuations of predominantly US technology firms, citing growing fears of an artificial intelligence investment bubble.
Furthermore, the Bank noted that UK share prices are nearing their "most stretched" levels since the 2008 crisis, adding a layer of complexity to the decision to ease capital requirements. The announcement was made on 2nd December 2025.
Governor's Defence and Industry Response
Bank Governor Andrew Bailey strongly defended the policy shift during a press conference, dismissing suggestions that it could plant the seeds for a future financial crisis. "We have been through some very, very substantial economic shocks in recent years and the banking system has come through this robustly," Mr Bailey stated. He emphasised the move was "perfectly reasonable and sensible."
When questioned on whether banks would use the freed-up capital for bumper shareholder dividends rather than lending, Mr Bailey insisted it was "not for us to dictate" their actions. However, he highlighted the symbiotic relationship: "if the banks support the economy by lending that will strengthen the economy, the banks will benefit from that in terms of their returns."
The FPC's review found that UK banks currently carry less risk on their balance sheets than at any point since early 2016. It concluded that the updated requirements reflect its view that the UK banking system remains resilient enough to support the economy even if conditions deteriorate substantially.
Russ Mould, Investment Director at AJ Bell, commented: "The UK banking sector has passed the Bank of England’s stress test with flying colours." He noted that lessons from 2008 had made banks stronger entities, and the latest tests show major lenders could withstand a severe economic decline while continuing to support consumers and businesses.
Despite the confidence in the banking system, the FPC acknowledged that threats to financial stability have increased this year, primarily flagging the risks from stretched equity valuations. Nevertheless, with UK household and corporate debt remaining relatively low, the Bank has gained the confidence to proceed with this historic recalibration of capital rules.
