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The Bank of England has revised its capital requirements for UK banks, reducing the amount they need to hold after successfully passing the most recent stress tests. This marks the first significant relaxation of regulations since the 2008 financial crisis.

In its inaugural capital requirement review since 2019, the Bank of England announced a reduction in the “appropriate benchmark” for tier one capital. This benchmark, which determines how much capital banks should have to cover potential losses in a crisis, has been decreased from 14 percent to 13 percent.

The Financial Policy Committee of the Bank of England, led by Governor Andrew Bailey, made this decision, which has been positively received by both banks and the government. This move comes after prolonged advocacy for easing the stringent regulations put in place following the 2008 financial turmoil.

The central bank’s report, released on Tuesday, stated: “With the FPC’s benchmark now lowered, banks can have increased certainty and confidence in deploying their capital resources to support lending to UK households and businesses.”

Chancellor Rachel Reeves recently called on the Bank of England to take action to stimulate the economy and direct more investments towards high-growth businesses. The Labour government faces increasing pressure to revive an economy that expanded by a mere 0.1 percent in the last quarter.

“We don’t want the banks any longer to be on the naughty step,” City minister Lucy Rigby told the FT Banking summit on Tuesday, adding that “the financial crisis obviously was quite some time ago, we need a narrative around banks to be up to date”.

Regulators said they were confident about the resilience of the biggest UK banks after testing their ability to withstand a crisis scenario in which unemployment doubled to 8.5 per cent, house prices dropped 28 per cent and GDP contracted 5 per cent. 

It said that in such a scenario, the banks would still have £60bn of capital above their minimum requirements. The buffer, it added, meant they “would have the capacity to continue lending to creditworthy households and businesses throughout the stress”.

Banks are subject to risk-weighting rules that determine how much capital they allocate to loans depending on their riskiness.

Shares in the UK’s biggest banks, including Barclays, HSBC and Lloyds, climbed about 1 per cent on Tuesday morning.

“Whilst the contents of this paper are constructive for UK banks, the most important elements were already known,” said Benjamin Toms, an analyst at RBC Capital Markets.

For more than a decade, banks have been pushed to increase how much equity capital they have, making them more resilient and less likely to need taxpayer bailouts that characterised the 2008 crisis.

In setting out its decision to lower its estimate, the FPC said it had “revisited its assessment of the appropriate capital requirements for the banking system from the perspective of the costs and benefits to growth”.

The FPC, the arm of the BoE responsible for overseeing financial stability risks, said that risk-based capital requirements for large UK banks were similar to those in the Eurozone, but lower than in the US after adjusting for the way risks are measured.

It also found some areas where UK rules were stricter than the US and EU. As a result, it said it would review the leverage ratio that required banks to have a set amount of capital relative to their total assets.

British banks fear losing more ground to their bigger Wall Street rivals after US authorities, led by Federal Reserve vice-chair of supervision Michelle Bowman, embarked on a major rollback of regulations on the country’s lenders.

UK regulators said on Tuesday that the “underlying optimal level” of tier one capital for UK banks was 11 per cent, but it had added an extra 2 percentage points to account for “outstanding gaps and shortcomings” in how lenders measure the riskiness of their assets.

The review from the central bank came as it also repeated its warning that the surge in shares of companies tied to the artificial intelligence boom had increased risks to the financial system.

In its financial stability report, also released on Tuesday, the FPC said that “risky asset valuations remain materially stretched”, raising the “risk of a sharp correction”.