BoE reduces Tier 1 capital demand to boost lending and growth

December 03, 2025 (MLN):  The Bank of England (BoE) on Tuesday made its first reduction in bank capital requirements since the global financial crisis, aiming to support lending and stimulate the UK economy.

Following a review of its capital framework, the central bank said the benchmark Tier 1 capital requirement for lenders would fall from 14% to 13%, a level that had remained unchanged since 2015, according to Reuters.

Governor Andrew Bailey said the shift reflects both the evolution of the banking system and current economic conditions, and stressed he does not believe the adjustment will contribute to future financial instability.

The decision had been widely expected by banking executives and investors, particularly as regulators in the United States and Europe prepare to ease their own rules. Analysts described the BoE’s move as meaningful yet measured.

In its half yearly Financial Stability Report, the BoE outlined plans to review the usability of capital buffers and the operation of the leverage ratio steps that could lead to further easing of requirements.

Shares in major UK banks, including HSBC, Barclays, Lloyds, and NatWest, rose between 1% and 1.5%, outperforming the broader market.

The central bank also said the seven largest UK lenders had passed its stress tests, showing resilience to severe economic and financial shocks.

The shift comes as British authorities work to support economic growth, a priority for the Labour government. Financial services minister Lucy Rigby told a London banking conference that the UK wants to keep its regulatory environment competitive with other major financial centres.

Bailey urged banks to direct newly available capital toward lending rather than shareholder returns.

Global regulators tightened capital requirements after the 2008 crisis, but industry leaders have argued in recent years that those measures have served their purpose. Analysts at RBC Capital Markets called the changes constructive for UK banks, though largely anticipated.

Part of the reduction reflects the UK’s plan to implement Basel 3.1 global banking standards in 2027.

The BoE’s change comes as the Trump administration in the United States is expected to ease capital rules for major banks, while the European Union works on simplifying parts of its prudential framework.

Under the updated structure, the new 13% requirement comprises an underlying optimal level of 11%, plus a 2 percentage-point buffer to compensate for remaining uncertainties in the measurement of risk-weighted assets, Reuters reported.

The Financial Policy Committee (FPC), which has been reviewing the capital framework since July, said lenders should now have greater certainty and confidence to extend credit to households and businesses.

The FPC will continue examining the leverage ratio, focusing on how it interacts with ring-fencing and whether it has become more restrictive as banks shift toward safer exposures.

The BoE also said it will provide further details this week on a system-wide stress test covering fast-growing private markets.

Copyright Mettis Link News