FPC publishes bank capital review

Transcript

Conor MacManus: On 2 December 2025, the Bank of England's Financial Policy Committee (FPC) published its long-awaited review into the UK's Bank Capital Framework. This is the first time that the FPC has assessed the UK Bank Capital Framework since 2019, and the Committee has made a number of changes to the framework and indicated some important areas of focus for 2026.

The headline message is that the FPC has reduced the overall system-wide benchmark for tier one capital requirements from 14% to 13%. The FPC has chosen to do this for a range of reasons, including the reduced systemic importance of some banks, but also the expected positive impact of the implementation of Basel 3.1.

In addition to the headline reduction of overall tier one capital requirements, the FPC has also indicated a number of important areas of focus for 2026. These include a review into the leverage ratio framework. When the leverage ratio was introduced, it was designed to be a backstop measure for risk-based capital requirements. However, over time it has become a binding constraint for many banks. In light of this, the FPC and the PRA will be doing a review of the UK's leverage ratio to ensure that it still meets its original intent.

The FPC and PRA, working with international partners, will also be looking at the usability of capital buffers in 2026. Many banks in the UK operate significantly above their capital buffers, in part because of concerns around the implications of operating within the buffers. In light of this, the FPC and the PRA will be looking at ways to incentivise banks to operate within those buffers, particularly in a time of stress.

In addition to these reviews, the FPC has also indicated a number of other important areas of focus for 2026. These include the role of prudential thresholds in the framework, but also the interaction of different capital measures that use UK domestic exposures as the exposure measure.

The process for consultation on these changes is expected to start in early 2026. But for some of the areas of focus, for example usability of buffers, the FPC and the PRA will be working with international partners, which may influence the timeframe.