LONDON — The Bank of England announced on Tuesday it is planning to loosen capital requirements for major UK lenders. The central bank is looking to remove and loosen some rules that were introduced following the 2008 financial crisis.

These rules determine the required size of financial cushions that banks must hold to absorb losses, intended to protect consumers and taxpayers. The Bank's financial policy committee indicated that its plans include scrapping a longstanding buffer within the leverage ratio. This change would primarily benefit the UK's largest domestic-focused banks and building societies, including NatWest, Lloyds, Nationwide, and Santander UK, by potentially reducing their leverage ratio by 20 basis points on average.

The financial policy committee is conducting a review to determine if this proposal would create any financial stability gaps. Some members of the financial policy committee expressed concerns that reducing buffers could increase current risks to the financial system. The committee stated: "Some FPC members were concerned that the proposal might lead to an unwanted increase in market-based leverage, with implications for the resilience of core UK markets."

The review is scheduled for completion by the end of September. Its outcomes will influence the package of capital changes that will be presented for consultation in early 2027. The Bank of England stated that previous risks, such as stretched share price valuations, high public debt, and risky private credit lending, have not dissipated. It also noted additional dangers arising from investors borrowing money to purchase shares.

According to the Bank of England, "A reassessment of these prospects could trigger a fall in equity prices that might be amplified by high concentration, correlated momentum-driven positions that can exacerbate volatility as markets fall, and increased leverage." Despite these concerns, the Bank of England judged that Britain's banking system remained resilient. The proposals will be issued for consultation.

Why It Matters

The Bank of England's intention to loosen capital requirements marks a shift in the regulatory framework established after the 2008 financial crisis to enhance financial stability. The proposed changes, particularly the removal of a leverage ratio buffer, are intended to benefit UK-based lenders, potentially altering the financial resilience landscape for these institutions. The ongoing review by the financial policy committee aims to assess the broader implications for financial stability, with its findings expected to shape future capital requirement policies through 2027.