FPC publishes bank capital review

What does this mean?

In 2015 the FPC set out its view of appropriate UK bank capital levels, reaffirmed in 2019. Since then, the banking system has proved resilient to a number of shocks. Against this backdrop, the FPC has undertaken a review of:

• the overall level of capital needed in the system

• the functioning and efficiency of the capital framework (including risk-weighted and leverage requirements)

• whether the framework remains proportionate and supportive of sustainable growth in the real economy. 

The FPC now judges that a Tier 1 capital ratio of 13% of RWAs at the system level is appropriate (equivalent to around 11% CET1), compared with the previous reference point of 14%. The FPC’s decision has been informed by a range of factors including: falling average risk weights due to changes in asset composition and modelling, the lower systemic importance of some major institutions, and the expected improvements of risk measurement from Basel 3.1 implementation. The FPC emphasises its view that material reductions below this level could raise the probability and severity of future crises and increase funding costs. The PRA expects average Pillar 2A requirements for major UK lenders to fall from around 2.5% to around 2% of RWAs once Basel 3.1 is fully implemented, which will bring system-wide Tier 1 capital requirements to around 13%.

The FPC states that UK capital requirements are broadly comparable with those in the euro area (once differences in accounting and modelling are taken into account) and are lower than in the US on a like-for-like basis. However, the FPC does acknowledge that some domestically focused UK banks face relatively high constraints from the leverage ratio compared with peers in other jurisdictions, due to leverage buffer requirements. This has particular implications for lenders focused on UK retail and SME markets.

The review also identifies several areas where the FPC plans further work to refine the UK’s capital framework. These are:

Buffer usability

On aggregate UK banks have CET1 ratios around 2% higher than regulatory requirements (including buffers). Evidence suggests this is, in part, because banks are reluctant to use buffers due to stigma, automatic distribution restrictions and rating considerations. The FPC, working with the PRA and international authorities, will examine ways to facilitate the use of buffers, including reducing incentives to maintain capital in excess of regulatory requirements and buffers in normal times. Options could include a single, more clearly releasable buffer and a more supervisory-judgement-based approach to restricting distributions. 

Leverage ratio framework

The leverage ratio was originally intended to be primarily a ‘backstop’ measure in the capital framework. However, the leverage ratio has become binding for more banks than originally expected, largely because average risk weights have fallen. In light of this, the FPC will review the leverage ratio regime to assess how it is operating in practice, interacting with other policies and whether it is still meeting the FPC’s original objectives. 

Interaction of UK-exposure-based requirements

Multiple requirements in the UK capital framework are linked to UK exposures. Examples include the Countercyclical Capital Buffer, Other Systemically Important Institution buffers, Pillar 2A concentration risk and elements of stress testing. The FPC has received feedback that these requirements discourage domestic lending, and the BoE has committed to undertake further work to assess how these different requirements interact. 

Proportionality and threshold indexation

The prudential regime includes a number of thresholds above which firms come into scope of additional requirements. Some of these thresholds have recently been updated to account for nominal GDP growth. However, others have not, leading to ‘prudential drag’, with firms coming into scope of policies that were not originally designed with them in mind. In light of this, the BoE is exploring an approach for automatic indexation of regulatory thresholds, which would provide greater transparency and predictability to industry. The PRA intends to consult on a proposed approach in 2026.

Ring-fencing and Basel 3.1 interactions

The PRA will also review the application of the Basel 3.1 output floor at the ring-fenced sub-group level. It will do so post Basel 3.1 implementation, but before full weighting of the output floor in 2030.

What do firms need to do?

The FPC’s review sets the strategic direction for the next phase of evolution of the UK’s capital framework. The FPC’s position is clear; it sees scope for changes to the existing framework, both in terms of a limited reduction in overall levels of capital requirements, and amendments to important measures in the framework, to mitigate unintended consequences or to reflect changing dynamics in the banking sector. The review also provides a clear indication of the specific areas of further focus for the FPC and PRA. 

The review provides some welcome information for firms to factor into capital planning. However, the future outcome of the ongoing reviews, particularly on buffers, the leverage framework and prudential thresholds, may provide more granular information to guide forward-looking capital calibration, capital allocation and business or portfolio strategy.

The outcome of these reviews will not be clear until during 2026 (and in the case of the review of useability of buffers is likely to be dependent on discussions at the international level). However, any material changes to these elements of the capital framework would be significant. 

The FPC’s capital review is one component of more holistic changes to the UK’s regulatory framework, inspired by an increased focus on growth and competitiveness. It will be important that firms consider the review and subsequent changes strategically and in the context of a wider range of initiatives. These include (where relevant) the review of ring-fencing, the PRA’s review of the capital requirements for mortgages under internal ratings-based (IRB) models, the FCA’s reform to mortgage rules, the strong and simple regime and the increased supervisory focus on risk management capability and data accuracy. Firms operating globally should also consider the implications of changes to the UK regime in the wider context of planned changes to the prudential framework in other major jurisdictions.

Next steps

The FPC and PRA will undertake further policy development throughout 2026, including a consultation on threshold indexation and potential changes to buffer and leverage frameworks. The process of consultation on these issues is expected to start in ‘early 2026’.