FPC sets out reforms to UK bank capital framework

What does this mean?

The Financial Policy Committee (FPC) has reaffirmed its December 2025 assessment that the appropriate benchmark for system-wide Tier 1 capital remains around 13% of risk-weighted assets, equivalent to a Common Equity Tier 1 (CET1) ratio of approximately 11%. The FPC has, however, set out a number of proposed amendments to the design of the UK’s capital framework. 

One of the FPC’s key policy objectives is improving the usability of regulatory capital buffers. The FPC recognises that, although buffers are intended to absorb losses during periods of stress, banks are often reluctant to use them because of concerns about automatic distribution restrictions, supervisory expectations and market perceptions. As a result, firms may seek to preserve capital by reducing lending or shrinking balance sheets, undermining the purpose of the framework. 

The FPC therefore reiterates its longer-term ambition of moving towards a simpler framework centred on a single releasable capital buffer, and has committed to working with the PRA and international partners to seek to achieve this. As an initial step, the PRA intends to make the Other Systemically Important Institution (O-SII) buffer releasable during systemic stress, allowing domestic systemically important banks greater flexibility to support lending during downturns. Releasing the O-SII buffer would lower the level of capital at which automatic distribution restrictions apply in stress.

The FPC is also proposing targeted reforms to the UK leverage ratio framework. It considers that the current implementation has become more binding than originally intended because of declining average risk weights and the interaction between leverage requirements and the Countercyclical Capital Buffer (CCyB). To address this, the FPC intends to consult on removing the Countercyclical Leverage Buffer (CCLB), recalibrating the Additional Leverage Ratio Buffer (ALRB) to 50% of risk-weighted systemic buffers (in line with Basel standards) and reducing the minimum leverage ratio from 3.25% to 3%, but introducing a new releasable general leverage buffer of 0.25%. Collectively, these proposals are intended to make the leverage framework more proportionate while preserving its role as a backstop to risk-weighted capital requirements. The FPC estimates that the package would reduce effective leverage requirements for major UK banks by around 20 basis points without materially reducing overall resilience. 

Beyond these immediate reforms, the FPC has also signalled further work to simplify interactions between domestic capital requirements, including the CCyB, O-SII buffers and Pillar 2A requirements. This reflects a broader objective of reducing unnecessary complexity while maintaining an appropriate level of resilience. Further proposals are expected later in 2026 following additional analysis by the FPC and PRA. 

What do firms need to do?

Although the proposals remain subject to consultation, firms should begin assessing their potential implications now.

Banks should evaluate how the proposed reforms could affect internal capital targets, leverage management and recovery planning. In particular, firms should consider whether existing governance frameworks and management buffers remain appropriate if regulatory expectations increasingly support the active use of capital buffers during periods of stress.

Institutions subject to the leverage ratio should assess the potential implications of removing the Countercyclical Leverage Buffer, introducing a releasable general leverage buffer and recalibrating the Additional Leverage Ratio Buffer. These changes may influence balance sheet strategy, capital efficiency and leverage management.

Firms should also monitor the PRA's forthcoming consultations on buffer usability, leverage requirements and domestic systemic buffers. While the overall calibration of capital is expected to remain unchanged, the proposals could materially alter how firms manage capital through the cycle and how they approach capital planning, stress testing and distributions.

Next steps

The PRA is expected to consult on the proposed reforms during 2026. The FPC has also committed to further work on domestic capital requirements and buffer simplification, with additional proposals expected in the Q4 2026 Financial Stability Report.