Regulation
February 9, 2026
When regulators talk about bank capital, they are not discussing an abstract technical ratio. They are assessing whether the banking system is strong enough to support the economy in good times and bad, and, crucially, whether it can continue lending when shocks hit.
This is the core task of the Financial Policy Committee (FPC). Its latest assessment of UK bank capital requirements revisits a framework last reviewed almost a decade ago, in 2015. The update matters because the banking system has changed, risks have evolved, and the balance between financial safety and economic support needs to be recalibrated.
This article takes a closer look at the FPC’s latest review of bank capital, unpacking what sits behind the headline numbers and why they matter for households, businesses and the broader economy.
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Why the FPC Is Recalibrating UK Bank Capital Requirements
The FPC’s primary concern is the resilience of the banking system as a whole and its impact on the wider economy. Banks are a regulated sector because their failures impose costs well beyond shareholders—a reality underscored by episodes ranging from the global financial crisis to the COVID shock.
A resilient banking system is a prerequisite for macroeconomic stability. Beyond its role in credit intermediation, bank solvency determines whether financial stress is contained within the sector or transmitted to the wider economy during downturns.
Capital requirements are the main macroprudential tool used to address this risk. By setting minimum capital thresholds, the Financial Policy Committee (FPC) aims to ensure that banks can absorb losses while continuing to lend, reducing the likelihood that financial stress spills over into the broader economy.
Understanding The 13% Benchmark of the FPC’s New Assessment
One of the headline outcomes of the assessment is a new benchmark capital requirement of around 13% of risk-weighted assets, down from the 14% level identified in the FPC’s 2015 review.
In simple terms, a bank’s capital ratio compares the capital it has available to absorb losses with the risks it has taken on its balance sheet. Not all assets are treated equally: a mortgage loan, for example, is considered less risky than unsecured consumer credit, and the ratio adjusts for these differences through risk weighting.
For those inside the banking sector, this is the most important number there is. It is the ratio that boards, CEOs and investors watch most closely because it provides the clearest signal of a bank’s financial health.
The decision to lower the benchmark reflects the FPC’s assessment that risk on banks’ balance sheets has declined since the last review. The analysis points to three main drivers:
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Banks’ assets have become less risky once properly weighted.
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Fewer institutions are now considered systemically important.
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Several capital buffers have been recalibrated downward as risks evolved.
For the economy, the implication is broadly positive. Lower required capital suggests a stronger system that can free up resources, support lending and do so on better terms, reflecting confidence in banks’ underlying solvency.
Why the 13% Level Is Considered the Appropriate
At the core of the FPC’s assessment is the question of calibration: how to set capital requirements at a level that protects financial stability without unnecessarily constraining economic activity. Capital requirements that are set too high can tie up resources on bank balance sheets, limiting lending capacity and weighing on growth, investment, and credit to households and businesses.
At the same time, requirements that are set too low carry their own costs. If markets perceive that banks lack sufficient buffers to absorb losses, confidence can weaken. In practice, this tends to translate into higher funding costs, as investors demand greater compensation for risk, ultimately feeding back into the cost and availability of credit.
The FPC’s conclusion is that a benchmark of 13% represents an appropriate balance between these competing considerations. The reduction from the previous 14% level reflects the committee’s assessment that risks on banks’ balance sheets have declined since the last review, while still leaving banks with sufficient capacity to withstand adverse scenarios.
Importantly, this regulatory judgement appears to be consistent with market signals. Bank valuations have improved, price-to-book ratios have strengthened, and higher dividends and share buybacks suggest increased investor confidence in the solvency of the UK banking sector. In this sense, supervisory assessments and market perceptions are broadly aligned around the current calibration of capital requirements.
Stress Tests: Useful, but Not the Whole Picture
Stress tests are part of this framework, but they are not the only tool. They help the FPC evaluate how banks would cope with severe but plausible shocks—such as deep recessions or sudden market stress—and inform decisions on capital adequacy.
A notable update in the document is the shift towards less frequent stress testing, moving to a biannual cycle. The rationale is pragmatic: stress tests remain informative, but they are operationally demanding, often requiring dedicated teams within banks.
Stress tests are an important part of the framework used by the FPC to assess bank resilience, particularly in adverse economic scenarios. They provide insight into how banks would perform under severe but plausible shocks, but they sit alongside a broader set of supervisory tools that also inform decisions on capital requirements and overall system stability.
Beyond Capital Ratios: Leverage and Buffers
Stress tests help inform the FPC’s view of bank resilience under adverse scenarios, but they are only one element of a broader supervisory framework. Decisions on capital requirements also rely on other tools designed to capture different sources of risk and to ensure resilience across the economic cycle.
Alongside risk-based capital ratios, the FPC places particular emphasis on two additional instruments:
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The leverage ratio, which sets a minimum level of capital relative to total assets. Its role is to limit excessive leverage and act as a backstop to risk-based measures, ensuring that banks do not expand their balance sheets to levels that leave them vulnerable to relatively small shocks. While most banks currently meet the requirement comfortably, it remains a key pillar of overall solvency.
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Capital buffers, which are deliberately designed to be flexible. They allow the regulator to adjust total capital requirements in response to economic conditions. During the COVID crisis, for example, buffers were released to avoid forcing banks to restrict lending at a time of acute stress, supporting the flow of credit to the real economy.
Looking ahead, the FPC signals an intention to review the design of these buffers. The aim is to make them simpler, more transparent and more readily releasable, while improving their perceived usability, so they can be used more effectively when conditions deteriorate, without undermining confidence in the resilience of the banking system.
How UK Banks Compare Internationally
The assessment also places UK banks in an international context. While cross-country comparisons are complicated by differences in how risk-weighted assets are calculated, the broad conclusion is that UK capital and leverage requirements are broadly in line with those in the European Union, and higher than those applied in the United States.
This suggests that the UK framework sits within international norms rather than at either extreme.
The Road Ahead
Taken together, the FPC’s analysis supports a clear conclusion: the UK banking sector is resilient and capable of supporting economic growth, under normal conditions and also during periods of stress. The decision to lower required capital should not be interpreted as a weakening of safeguards. Rather, it reflects improved balance-sheet quality, stronger market confidence, and a regulatory framework that continues to adapt as risks evolve.
At the same time, the assessment points towards further changes in how bank capital is structured and applied. The FPC signals an intention to refine the capital framework to make it more effective, efficient and proportional. This includes a push towards greater simplicity, improved usability of capital buffers, potential refinements to the leverage ratio, and a more differentiated approach between smaller institutions and systemically important banks.
How these reforms are implemented will be critical. Their success will determine whether the capital framework remains fit for purpose as a foundation for a stable banking system capable of supporting the real economy over the long term. And, of course, also as a safeguard against future financial crises.
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