The Bank of England has announced a significant shift in its regulatory stance, revealing plans to lower the capital requirements for the UK’s high street banks. This decision marks the first time since the global financial crash of 2008 that these specific safety rules have been relaxed. By reducing the “risk-weighted assets” requirement by one percentage point to approximately 13%, the central bank aims to free up capital that banks are currently required to hold in reserve.
Governor Andrew Bailey has moved quickly to defend the decision against critics who fear it could leave the financial system vulnerable. Speaking at a press conference, Bailey insisted that the lessons of the 2008 crisis have not been forgotten. He described the move as a “sensible reflection” of the current strength of the banking sector. He emphasized that while the crisis is in the past, the regulatory discipline learned from it remains a priority for the Bank.
The changes, which are scheduled to take effect in 2027, are intended to encourage banks to lend more freely to households and businesses. The central bank believes that the current capital buffers are larger than necessary, often resulting in money sitting idle rather than stimulating the economy. Recent stress tests on the UK’s seven largest lenders, including heavyweights like HSBC and Barclays, suggest they are robust enough to withstand severe economic downturns.
However, the move comes with warnings attached. The Bank’s Financial Policy Committee noted that risks to financial stability have actually increased over the past year. Specifically, there are growing concerns regarding the “shadow banking” sector and the ballooning valuations of artificial intelligence companies. Despite these looming threats, the Bank maintains that the traditional banking sector is resilient enough to handle a slight reduction in mandatory reserves.
Politically, the move aligns with the goals of Chancellor Rachel Reeves, who has been vocal about the need to cut red tape to foster economic growth. While there is no strict mandate forcing banks to use the freed-up capital for lending, Bailey expressed a strong expectation that banks would support the real economy rather than just funneling the extra cash to shareholders.