The Bank of England has released its latest assessment of the UK’s financial position and changed the amount of capital that banks must hold. The financial policy committee said in its stability report that risks to the system “have increased during 2025”. It pointed to global tensions, pressures on government debt and stretched valuations in markets exposed to artificial intelligence.
The committee said geopolitical tensions have kept global risks high, and that uncertainty in the economic outlook “persists”. The report also drew attention to concerns around lending to major technology firms and very high stock valuations in sectors linked to artificial intelligence. These conditions form the backdrop for its decision to adjust capital rules for banks.
The report explains that equity valuations for tech companies are close to the most stretched levels seen since the dot com period. It says lending linked to AI infrastructure is rising quickly and that a sharp correction could hurt lenders. According to the committee, deeper links between AI firms and credit markets could expose banks to losses if asset values fall.
What Has Changed In The Capital Rules?
The Bank has reduced the benchmark level of Tier 1 capital requirements for the banking system from around 14% of risk weighted assets to around 13%. According to the committee, this reflects changes since its first assessment in 2015, such as lower average risk weights and lower systemic importance of some banks. It also refers to improvements in risk measurement that will come with the Basel 3.1 rules.
The report says the new benchmark is equal to a common equity Tier 1 ratio of roughly 11%. It adds that banks should now have greater certainty when using capital resources to lend. The committee said most banks already sit above required levels and that none was asked to strengthen its position after this year’s stress test.
In that stress test, the aggregate CET1 ratio started at 14.5% and went down to 11.0% in the first year. According to the Bank, even at the low point banks stayed well above required minimums. The committee said this shows that the sector can support households and businesses even in conditions that are much worse than expected.
The committee kept the countercyclical capital buffer at 2%. It said UK household and corporate indebtedness is low and that recent easing in credit conditions matches the economic picture and changes to mortgage conduct rules.
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Why Does The Bank Believe The System Can Handle Rising Risks?
According to the report, household and corporate debt levels “remain low” and arrears are also low. Mortgage lending growth came up to 3.2% year on year, above the post financial crisis average of 2.2%. The Bank said lenders have increased approvals and supplied more credit since changes to mortgage conduct rules earlier in the year.
Corporate debt looks manageable as well. The report says the corporate net debt to earnings ratio stands at 134%, far below the highs seen after the financial crisis. It explains that benign credit conditions help companies refinance, though global shocks could affect highly leveraged firms as refinancing deadlines approach.
The committee also pointed to strong bank earnings and price to tangible book ratios above one for major banks. The report says this supports resilience across the system. It adds that the UK banking sector is well capitalised and carries robust liquidity and funding positions.
According to the committee, it will continue monitoring risks linked to AI driven markets, high valuations in US and UK equities and leveraged positions in sovereign debt markets. It stressed that the system is strong enough to absorb shocks and continue serving households and businesses even under stress conditions.
