Financial Stability Report - December 2025

Financial Stability Report Summary

The Financial Policy Committee (FPC) seeks to ensure the UK financial system is prepared for, and resilient to, the wide range of risks it could face so that the system is able to absorb rather than amplify shocks and serve UK households and businesses.

The overall risk environment

Risks to financial stability have increased during 2025. Global risks remain elevated and material uncertainty in the global macroeconomic outlook persists. Key sources of risk include geopolitical tensions, fragmentation of trade and financial markets, and pressures on sovereign debt markets. Elevated geopolitical tensions increase the likelihood of cyberattacks and other operational disruptions.

In the FPC’s judgement, many risky asset valuations remain materially stretched, particularly for technology companies focused on Artificial Intelligence (AI). Equity valuations in the US are close to the most stretched they have been since the dot-com bubble, and in the UK since the global financial crisis (GFC). This heightens the risk of a sharp correction.

The role of debt financing in the AI sector is increasing quickly as AI-focused firms seek large-scale infrastructure investment. By some industry estimates, AI infrastructure spending over the next five years could exceed five trillion US dollars. While AI hyperscalers will continue to fund much of this from their operating cash flows, approximately half is expected to be financed externally, mostly through debt. Deeper links between AI firms and credit markets, and increasing interconnections between those firms, mean that, should an asset price correction occur, losses on lending could increase financial stability risks.

Credit spreads remain compressed by historical standards. Two recent high-profile corporate defaults in the US have intensified focus on potential weaknesses in risky credit markets previously flagged by the FPC. These include high leverage, weak underwriting standards, opacity, complex structures, and the degree of reliance on credit rating agencies, and illustrate how corporate defaults could impact bank resilience and credit markets simultaneously.

While the impact of these specific defaults has been limited, a diverse range of financial market participants were exposed. Such diversity can help absorb risks, but opacity around the extent of exposures, and their possible interconnections, can also create uncertainty about how widely shocks in credit markets can propagate. It is important that market participants have a clear understanding of their exposures, including in stress scenarios where correlations and losses can shift outside historical norms. Market participants should also ensure that underwriting standards are robust and that they do not over-rely on credit ratings as a substitute to carrying out appropriate due diligence.

Private markets have grown significantly in the UK over the past two decades and are an important source of funding for corporates. While resilient to date, the private markets ecosystem has not been tested through a broad-based macroeconomic stress at its current size. In order to enhance understanding of the broader risks and dynamics of private markets, the FPC supports the next system-wide exploratory scenario (SWES), focused on the resilience of the private markets ecosystem.

Public debt-to-GDP ratios in many advanced economies have continued to rise this year. Governments globally face spending pressures, given the context of changing demographics and geopolitical risk, potentially constraining their capacity to respond to future shocks. Significant shocks to the global economic or fiscal outlook, should they materialise, could be amplified by vulnerabilities in market-based finance (MBF), such as leveraged positions in sovereign debt markets.

As an open economy with a large financial centre, the UK is exposed to global shocks, which could transmit through multiple, interconnected channels. Stress in one market, such as a sharp asset price correction or correlation shift, could spillover into other markets. Simultaneous de-risking by banks and non-banks can lead to fire sales, widening spreads and tightening financing conditions for UK households and corporates. Market participants should ensure their risk management incorporates such scenarios.

UK household and corporate aggregate indebtedness remains low. The UK banking system is well capitalised, maintains robust liquidity and funding positions, and asset quality remains strong. The results of the 2025 Bank Capital Stress Test demonstrate that the UK banking system is able to continue to support the economy even if economic and financial conditions turn out to be materially worse than expected. This underscores the role of financial stability as a pre-condition for sustainable growth.

As part of ensuring the UK banking sector is both resilient and able to support growth, the FPC has reviewed its assessment of the appropriate level of bank capital requirements (published alongside this FSR, for further details refer to Financial Stability in Focus: The FPC’s assessment of bank capital requirements). The Committee judges that the benchmark for system-wide Tier 1 capital requirements, previously judged to be around 14% of risk-weighted assets (RWAs), is now around 13% of RWAs. That judgement is consistent with the evolution in the financial system since the FPC’s first assessment in 2015, including a fall in banks’ average risk weights, a reduction in the systemic importance of some banks and improvements in risk measurement.

The FPC and sustainable growth

Maintaining financial stability is essential to supporting sustainable economic growth over the long term. A stable financial system supports lower risk and term premia, lowering the cost of borrowing and improving incentives to fund long-term productive investment. In line with its remit, the FPC seeks to maintain financial stability by identifying, monitoring, and addressing systemic risks to the financial sector – including those set out in this Report – so that the financial system can support the UK economy in both good times and bad.

In response to the Chancellor’s request in the FPC’s November 2024 remit letter, the FPC has assessed and identified areas where the financial sector could contribute further to supporting sustainable growth through higher productivity growth, investment and innovation. The financial sector plays a role in contributing to productivity growth by providing vital services to UK households and businesses, including the provision of financing for investment in capital and technology. But there are a broader range of factors across the economy at play in driving productivity growth, such as trade conditions, scientific and technological innovation, and human capital.

Lending to UK households and corporates has in the past fluctuated due to changes in financial and macroeconomic conditions. Incentives in the financial system led to unsustainable lending growth in boom times followed by periods of deleveraging during the resulting downturn. However, post-GFC regulation has increased bank resilience. Combined with the FPC’s use of the countercyclical capital buffer (CCyB) in stress, this has enabled the banking sector to continue to support households and businesses through recent shocks to the economy.

Lending to small and medium-sized enterprises (SMEs) has been weak since the GFC, reflecting both the small share of SMEs seeking credit and historical barriers these firms face in accessing finance. These barriers are not unique to the UK, with SMEs across many economies facing similar challenges. New lenders that have entered the market over the past decade are increasing their share of SME lending, particularly for SMEs which do not meet the appetite of larger lenders. For further detail refer to Box B of the FSR.

The FPC has already taken steps to ensure that its resilience-building measures are implemented efficiently as the financial system evolves. Recent examples of this include reducing the frequency of its main Bank Capital Stress Tests to every other year and recommending an amendment to the implementation of its loan to income (LTI) flow limit to allow individual lenders to increase their share of lending at high LTIs.

The FPC has undertaken work to assess and identify areas where there is potential to increase the ability of the financial system to contribute to sustainable economic growth, and potential solutions to the impediments the sector might face in doing so (refer to Box A for more details). These include barriers faced by pension funds and insurers in supporting long-term capital investment in the UK economy; challenges high-growth firms face in accessing domestic finance at larger funding rounds; and issues in the financial sector’s responsible adoption of innovative technology. The FPC supports:

• The changes made by the Prudential Regulation Authority (PRA) to Solvency II to encourage investment in productive assets by UK insurers, particularly through its reforms to the Matching Adjustment (MA) regime and its introduction of a Matching Adjustment Investment Accelerator (MAIA). This should support delivery of the UK insurance industry’s commitment to invest £100 billion in UK productive assets over 10 years.
• Work to ease impediments to high-growth firms accessing funding, including use of public-private partnership funding initiatives to channel financing to these firms and the broader population of SMEs to support productivity improvements, and supporting the working group on lending backed by intellectual property established as part of HM Government’s Industrial Strategy.
• Efforts by authorities and industry to support the UK financial system’s adoption of innovative technology, including through the National Payments Vision, the Bank’s AI consortium and the Financial Conduct Authority’s (FCA’s) AI Lab’s Live Testing service.

The FPC remains committed to identifying further ways in which it can deliver on its objectives to support sustainable economic growth.

For further details refer to Section 1 and Box A of the FSR.

UK households and corporates

UK household and corporate aggregate indebtedness remains low. The share of households in arrears on their borrowing or with high debt-servicing burdens is low by historical standards. However, some groups are more vulnerable to economic shocks than others, with renters remaining under pressure. In line with easing monetary policy and a competitive mortgage market, quoted mortgage rates have continued to decrease. And, continuing the trend from July, growth in mortgage lending has risen to 3.2% year on year, above the post-GFC historical average of 2.2%.

Mortgage lenders have been adjusting their behaviour following the March 2025 clarification of the FCA’s Mortgage Conduct of Business (MCOB) rules and recent changes in the FPC’s recommendation on how to implement its LTI flow limit. While it remains too early to assess the full impact of these policy changes in the mortgage market, recent indicators suggest a higher supply of credit to households with net mortgage approvals reaching a nine-month high.

The corporate net debt-to-earnings ratio, at 134%, remains well below Covid (166%) and post-GFC (230%) highs. Nevertheless, potential shocks in global financial markets could increase the likelihood of corporate vulnerabilities crystallising, specifically for highly-leveraged corporates. Credit spreads remain tight by historical standards, which means funding conditions for corporates are currently benign. However, a sharp correction or crystallisation of global risks could constrain refinancing options for UK corporates. In markets serving higher-risk borrowers, such as leveraged loans and private credit, a larger proportion of outstanding debt has shorter maturity and therefore requires refinancing over the next few years, leaving corporates in such funding markets more exposed to a tightening of credit conditions or a deterioration in investor risk sentiment.

For further details refer to Section 3 of the FSR.

UK banking sector resilience

The UK banking system remains well capitalised. Major UK banks continue to report robust earnings, and their average price-to-tangible book (PtTB) ratios have increased further above 1 since the July FSR.

The results of the 2025 Bank Capital Stress Test indicate that the UK banking system would be able to continue to support the economy even if economic conditions turn out materially worse than expected, enabling it to contribute to long-term sustainable economic growth. The Bank Capital Stress Test scenario includes a severe global aggregate supply shock, leading to a deep recession across countries and a rise in inflation across advanced economies, with central banks raising interest rates to bring inflation back to target. In the stress test, the aggregate Common Equity Tier 1 (CET1) capital ratio starts at 14.5% and falls to a low point of 11.0% in the first year. No individual bank was required to strengthen its capital position as a result of the test.

At the low point of the stress test, bank capital remains well above the sum of aggregate regulatory minima and systemic buffers. Most of this headroom arises from banks beginning the test with capital in excess of regulatory requirements. The FPC and PRA do not oblige firms to maintain buffers in excess of regulatory requirements.

The FPC has maintained the UK CCyB rate at its neutral rate of 2%. While the global risk environment remains elevated, UK household and corporate aggregate indebtedness remains low. The easing of credit conditions since the FPC’s October meeting has been in line with the macroeconomic outlook, with some additional easing in the mortgage market related to policy developments (clarification of FCA MCOB rules and changes in the FPC’s Recommendation on how to implement the LTI flow limit).

As part of ensuring the UK banking sector is both resilient and able to support growth, the FPC has updated its assessment of the appropriate benchmark level of capital requirements for the UK banking system.

For further details refer to Section 4 and 5 of the FSR.

The FPC’s assessment of bank capital requirements

The Committee judges that the updated appropriate benchmark for the system-wide level of Tier 1 capital requirements is now around 13% of RWAs (equivalent to a CET1 ratio of around 11%), 1 percentage point lower than its previous benchmark of around 14%. Given the reduction in the FPC’s benchmark, banks should have greater certainty and confidence in using their capital resources to lend to UK households and businesses.

That judgement is consistent with the evolution in the financial system since the FPC’s first assessment in 2015, including a fall in banks’ average risk weights, a reduction in the systemic importance of some banks and improvements in risk measurement such as through the forthcoming implementation of Basel 3.1. The judgement is also consistent with the analysis of the range of capital requirements likely to maximise macroeconomic net benefits in terms of long-term growth. That analysis also suggested that materially lower capital requirements could lead to significant reductions in long-run expected GDP.

The FPC has also considered how the capital framework can be made more effective, efficient and proportionate. As a result:

• With the PRA and international authorities, the FPC will work to enhance the usability of regulatory buffers and so reduce banks’ incentives to have capital in excess of regulatory requirements.
• The FPC will review the implementation of the leverage ratio in the UK, to ensure that it functions as intended. Within this, the Committee intends to prioritise reviewing the UK’s approach to regulatory buffers in leverage ratio requirements.
• The FPC supports initiatives by the Bank to respond to feedback on interactions, proportionality and complexity in the capital framework. That includes considering how capital requirements related to domestic exposures interact. It also includes: developing a systematic approach for updating regulatory thresholds; contributing to HM Government’s review of ring-fencing; and responding to feedback received on the PRA’s discussion paper on internal ratings-based models for mortgage lending.

This assessment is published alongside the FSR (refer to Financial Stability in Focus: The FPC’s assessment of bank capital requirements for further details).

The resilience of market-based finance

Downside risks to the economic outlook and a potential broader market correction could interact with vulnerabilities in MBF. The interconnected nature of MBF means it can amplify shocks, including through large leveraged hedge fund positions in sovereign debt markets.

Leveraged borrowing by hedge funds in gilt repo markets remains elevated, reaching close to £100 billion in November. Data suggests this activity is related, at least in part, to the popularity of the cash-futures basis trade. A small number of hedge funds account for more than 90% of net gilt repo borrowing, with trades often transacted at zero or near-zero collateral haircuts and at very short maturities and so require regular refinancing. These vulnerabilities, in the context of compressed risk premia in a highly uncertain global environment, increase the risk of sharp moves. Funds could need to deleverage simultaneously in response to a shock if funding conditions tightened to the extent that refinancing became unavailable or prohibitively expensive. This reinforces the need for market participants to ensure the risk management of their positions takes account of potential shocks, including correlation shifts outside historical norms.

In September, the Bank, in close consultation with the FCA, and with input from HM Treasury and the UK Debt Management Office (DMO), published a discussion paper evaluating the effectiveness and impact of a range of potential reforms to enhance the resilience of the gilt repo market; such as, greater central clearing of gilt repo and minimum margin requirements on non-centrally cleared gilt repo transactions. Any structural reforms identified through this work will take time to implement, which underscores the importance of market participants ensuring their own preparedness for shocks.

Private markets have grown significantly in the UK over the past two decades and are an important source of funding for corporates. UK insurers’ exposures to private markets have been growing, including through increasing use of funded reinsurance contracts. While resilient to date, private markets have not been tested through a broad-based macroeconomic stress at their current size. The Bank will undertake a SWES focused on risks from the private markets ecosystem.

Two recent high-profile US corporate defaults demonstrated the risks associated with reliance on Credit Rating Agencies (CRAs) – the ratings associated with both corporates remained relatively stable until close to their defaults. Relatedly, there is some evidence (IMF October GFSR) of the expansion in recent years of smaller CRAs producing private ratings, including in the US insurance market. Competitive pressures could provide incentives for some CRAs to provide ratings that are designed to win custom. This underscores the risks of firms over-relying on credit ratings providers as a substitute to carrying out appropriate due diligence.

For further details refer to Section 6 of the FSR.

Structural changes in the UK financial system

Heightened geopolitical tensions and continued advances in technology have underlined the critical importance of operational resilience to the provision of vital services to households and businesses. The FPC supports further actions to be taken by firms and financial market infrastructures (FMIs) to build resilience to operational disruption, and by microprudential regulators to continue to strengthen the regulatory framework. In taking steps to build resilience, firms and FMIs should recognise the role they play in supporting confidence in the financial system, and how disruption to vital services could negatively affect saving, investment and economic growth.

The FPC met jointly with the Prudential Regulation Committee, the Financial Market Infrastructure Committee and the FCA to discuss the UK’s approach to enhancing the operational resilience of the UK financial system given the heightened threat landscape and increasing pace of technological change. They agreed about the importance of continued co-ordination on these issues. Boards of firms and FMIs should also work with authorities to use the findings of sector-wide exercises and stress tests such as SIMEX and the Cyber and Operational Resilience Stress Test to improve their understanding of actions they can take to mitigate impacts on financial stability. Given the interconnected nature of the global financial system, the FPC supports further international engagement on operational resilience.

The development of new financial products, such as stablecoins, and other distributed ledger technology (DLT) present both opportunities and risks to the UK financial system. The FPC recognises the transformative potential of technology associated with stablecoins and the importance of ensuring that the public can have the same trust in new forms of money as they do in existing ones. Use of regulated stablecoins could lead to faster, cheaper retail and wholesale payments, with greater functionality, both at home and across borders. The FPC also notes the potential for growth in the provision of funding directly from financial markets and non-bank financial institutions to support the supply of credit to UK households and businesses, even if deposits move from the banking system to stablecoins. In the UK, the Bank and FCA are developing regimes for systemic and non-systemic stablecoins to ensure appropriate resilience. Other jurisdictions, including the US, are also in the process of designing and finalising their regimes. The FPC welcomes work by the Bank to propose a regulatory regime for sterling-denominated systemic stablecoins, and the consultation paper published recently on this topic.

The FPC is continuing to monitor developments in the unbacked crypto-asset sector and its interconnectedness with the financial sector and the real economy.

Climate-related risks to financial stability are becoming more proximate, resulting in risks to asset prices and credit quality in severe but plausible scenarios. If investors reprice financial assets rapidly to reflect climate-related risks, Bank staff estimate that the resulting moves in asset prices could be comparable to those moves seen in recent market stress episodes.

As physical risks from climate change continue to increase over the longer term, lower insurance coverage could transfer risks to households, businesses, banks and governments. Supporting insurability through investments in resilience to physical risks from climate change would be beneficial to UK financial stability.

For further details refer to Section 7 of the FSR.

1: In focus – The FPC and sustainable growth

Maintaining financial stability is essential to supporting sustainable economic growth over the long term. In line with its remit, the FPC seeks to maintain financial stability by identifying, monitoring, and addressing systemic risks to the financial sector – including those set out in this Report – so that the financial system can support the UK economy in both good times and bad. In working to advance its primary objective, the FPC continues to take steps to ensure that its resilience-building measures are implemented efficiently and in a way that supports sustainable growth as the financial system evolves.

In response to the Chancellor’s request in the FPC’s November 2024 remit letter, the FPC has assessed and identified areas where the financial sector could contribute further to supporting sustainable growth through higher productivity growth, investment and innovation (Box A). This In focus section sets out how the FPC thinks about sustainable economic growth (Figure 1.1), building on the contents of the July 2025 Financial Stability Report.

Figure 1.1: The FPC is taking action to contribute to sustainable economic growth by:

1.1: The role of the financial sector in contributing to sustainable growth

Productivity growth is a key driver of economic growth. Over the past 15 years, UK labour productivity growth has been low by historical standards and relative to some other advanced economies.

In the long term, GDP growth is driven by changes to an economy’s supply capacity, which is determined by the amount of labour and capital available, and the efficiency with which these factors can be combined – known as total factor productivity. Labour productivity – measured as output per hour worked – is the main driver of living standards in the long run. Since 2010, UK labour productivity has been low by historical standards and relative to the US. From 2010–19, it was also low relative to other advanced economies (Chart 1.1).

Chart 1.1: UK productivity growth in recent years has been low by historical standards, and relative to some other advanced economies

Average growth in GDP per hour worked, UK, US and G7 excluding US and UK (weighted average) ^{(a) (b)}

Footnotes

• Sources: OECD and Bank calculations.
• (a) Average year on year growth in GDP per hour worked in 2020 US dollars, chain linked volume (rebased), purchasing power parity (PPP) converted. G7 excluding US and UK is weighted by total GDP in 2020 US dollars, chain linked volume (rebased), PPP converted. Weighted average excludes Canada for 1997 due to unavailable 1996 data.
• (b) This chart is not directly comparable to Chart 4.1 of the July 2025 FSR due to an update to the underlying OECD database.

In the 1990s, total factor productivity growth in most western economies was high, driven by the diffusion of information and communications technologies such as the internet, which have the characteristics of a General-Purpose Technology (GPT). Past GPTs have been shown to boost productivity for long periods of time, as discussed in a recent speech by Andrew Bailey.^{footnote [1]} Evidence shows that productivity growth slowed in the US in the mid-2000s, as it did in other countries including the UK.^{footnote [2]} And Adler et al (2017) find that population ageing, slowing human capital accumulation, and lower global trade all contributed to this slowdown.

As set out in the July 2025 Financial Stability Report, the global financial crisis (GFC) of 2008–09 negatively impacted the provision of vital services including bank lending (Box B), weighing on output and productivity growth. Additional shocks, including the UK’s decision to leave the European Union, the Covid pandemic, and the significant rise in energy prices in 2022 following Russia’s invasion of Ukraine, have compounded these effects although recent data suggest that the productivity effects of the pandemic have dissipated and there is no longer a significant drag due to the energy price shock. Other G7 countries have seen a similar slowdown in recent years, except the US where productivity growth has picked up since 2020 (Chart 1.1). US productivity growth has increased since the pandemic. There might be a range of reasons for that, but Bank analysis suggests it may partly reflect reallocation of activity and labour towards more productive sectors, and the strength of the US technology sector.

The financial sector plays a role in contributing to productivity growth by providing vital services to UK households and businesses, including the provision of financing for investment in capital and technology. But there are a broader range of factors across the economy at play in driving productivity growth, such as trade conditions, scientific and technological innovation, and human capital. Productivity growth can be accounted for by the level of capital deepening (capital stock per hour worked), and total factor productivity, ie the efficiency with which labour and capital can be combined. These challenges are best addressed by government and businesses, as set out in HM Government’s economic growth, industrial and infrastructure strategies, which emphasise the importance to economic growth of public-private partnerships, government investment and other policies such as planning reform.

While the UK has a large and sophisticated financial sector, the UK’s level of investment in capital formation as a proportion of GDP is low relative to other G7 nations and has remained among the lowest for many years (Chart 1.2). This could be driven by both demand for finance from businesses looking to invest in capital, as well as the supply of finance to those businesses.

Chart 1.2: Investment in the capital stock is low in the UK relative to other advanced economies and has been for many years

Gross fixed capital formation as a percentage of GDP, UK and G7 range, 1997–2024 ^(a)

Footnotes

• Sources: OECD and Bank calculations.
• (a) Gross fixed capital formation includes investment by businesses as well as public sector and dwellings investment.

Factors other than financial regulation have been the primary driver of low investment, and so low productivity. The volume of lending to the UK real economy has been stable as a share of GDP over the long run (Box B). And the FPC has aimed to set a level of bank capital that is likely to maximise macroeconomic net benefits in terms of long-term growth, both in its initial assessment in 2015 and its review this year (Box D). The growth of market-based finance and increased competition within the banking sector have diversified the supply of productive finance to the real economy.

1.2: Growth and the FPC’s primary objective

Maintaining financial stability is the foundation for sustainable growth. Periods of financial instability – such as the GFC – negatively impact the provision of vital services to households and businesses, weighing on output and productivity growth.

Because the financial sector plays a role in driving UK productivity growth, actions to support financial stability in turn support economic growth. As set out in the July 2025 Financial Stability Report, a stable financial system ensures the provision of vital services to households and businesses, which, in turn, support economic activity including funding, saving, insurance and payment services. These services all support productivity and economic growth.

Financial stability contributes to a stable and predictable economic environment, including by: supporting consumer and business confidence; making the UK an attractive place to do business for international investors; and supporting UK firms’ ability to compete abroad. Higher investment by businesses and saving by households increase the available capital for productivity-improving projects. And a stable financial system supports lower risk and term premia, lowering the cost of borrowing and improving incentives to fund long-term productive investment. These factors all facilitate the investment that drives long-term productivity growth (Figure 1.2).

Figure 1.2: A diagram illustrating the benefits of financial stability for productive investment and stable economic growth

The FPC’s work on financial stability also supports growth by avoiding the negative consequences of financial instability. Improvements to financial system resilience since the GFC have allowed it to continue to support UK households and businesses through periods of financial stress. For example, UK banks continued to lend to creditworthy households and businesses during recent shocks such as the Covid pandemic, the significant rise in energy prices in 2022 following Russia’s invasion of Ukraine, and episodes of market volatility.

The FPC primarily contributes to sustainable economic growth by maintaining financial stability. It does so by identifying, monitoring, and addressing systemic risks to the financial sector – including those set out in this report (Figure 1.1).

A resilient financial system is particularly important given the elevated global macroeconomic risk environment (Section 2), which could pose risks to debt sustainability and GDP growth globally. By monitoring risks to the global economic outlook, the FPC can act to support the resilience of the UK financial system to severe but plausible shocks.

The FPC also monitors household and corporate debt vulnerabilities (Section 3) and the resilience of the UK banking system, which provides the majority of lending to the UK real economy (Section 4). It also stress tests the major UK banks to ensure they are sufficiently resilient to continue to support households, businesses, and growth, even if economic and financial conditions are materially worse than expected (Section 5). Jointly, the resilience of households, corporates and the banking system supports the saving, investment and lending required for sustainable economic growth.

Financial markets are also an important source of funding for UK businesses (Box B). They provide vital financial services which are essential to the daily economic activity of UK households and businesses. Recent periods of financial instability such as in March 2020 and October 2022 demonstrated that vulnerabilities in the system of market-based finance can amplify shocks and affect the provision of vital services to businesses and households. Therefore, the FPC works to improve risk identification in, and the functioning and resilience of, market-based finance (Section 6). The FPC also uses system-wide exploratory scenarios to further understand interconnections between banks and other financial market participants.

The financial system is constantly evolving, and new risks emerging, as technological, economic, geopolitical, and broader societal shifts change the landscape in which it operates. Therefore, the FPC works to identify, assess and respond to structural changes and new risks in the financial system, including through improving macroprudential oversight of operational resilience (Section 7). The FPC takes action to support the responsible adoption of innovative technology by the financial sector. In doing so, the FPC – alongside the Bank – seeks to balance efficiency and resilience, in support of long-term growth.

All of these actions therefore contribute to maintaining a stable and predictable economic environment and creating the necessary conditions for the financial sector to facilitate sustainable growth.

1.3: Growth and the FPC’s secondary objective

Subject to its primary objective, the Committee has a secondary objective of supporting the Government’s economic policy, including its objectives for growth and employment.

The FPC judges that these objectives are complementary over the long-term: financial stability is necessary for sustainable growth, and sustainable growth supports financial stability – as explained in more detail in the July 2025 Financial Stability Report. For example, improvements in productivity growth would ease fiscal pressures and in turn support the resilience of sovereign bond markets globally. As set out in a recent speech by Jon Hall, the FPC’s mandate balances efficiency and resilience, in support of long-term growth. Further, the FPC’s statutory objectives are clear that it should not take any action that would have a significant adverse effect on the capacity of the financial sector to contribute to the growth of the UK economy in the medium or long term.

The FPC has already taken steps to ensure that its resilience-building measures are implemented efficiently as the financial system evolves. The FPC regularly reviews its policy measures; recent examples include reducing the frequency of its main Bank Capital Stress Tests to every other year and recommending the PRA and the FCA amend implementation of the FPC’s loan to income (LTI) flow limit to allow individual lenders to increase their share of lending at high LTIs while aiming to ensure the aggregate flow remains consistent with the limit of 15%.

And the FPC has reviewed its assessment of the appropriate level of bank capital requirements, considering the costs and benefits to long-term growth (Box D). This weighs the macroeconomic costs of capital (which stem from the impact of higher capital pushing up on borrowing costs) against the benefits of capital, which come about because higher bank capital reduces the likelihood and costs of financial crises. In its latest review, the Committee has taken into account the experience of the ten years since it first assessed the appropriate overall level of capital requirements.

Box A sets out the conclusions of the FPC’s 2025 work on growth and the financial system. The FPC remains committed to identifying further ways in which it can deliver on its objectives to support sustainable economic growth.

2: Developments in global vulnerabilities and financial markets

2.1: Developments in the global risk environment and financial markets

Risks to financial stability have increased during 2025. Global risks remain elevated and material uncertainty in the global macroeconomic outlook persists. Key sources of risk include geopolitical tensions, fragmentation of trade and financial markets, and pressures on sovereign debt markets. A crystallisation of such global risks could have a material impact on the UK as an open economy and global financial centre.

Geopolitical risk remains high. Trade policy uncertainty has remained elevated with the escalation and subsequent de-escalation around China’s rare-earth export controls, and the US Supreme Court is currently hearing a case on the legality of tariffs imposed by the current US administration. This uncertainty persists even though, since the July FSR, there have been announcements of a number of bilateral trade deals between the US and partners. In addition, new sanctions imposed on Russian oil over their continued war in Ukraine are a potential source of volatility in the oil market. Elevated geopolitical tensions increase the likelihood of cyberattacks and other operational disruptions, discussed in more detail in Section 7.

Tariffs are expected to weigh on global growth, driven both by the direct impact of tariff barriers and the dampening effect of trade policy uncertainty on firms’ investment decisions. Analysis in the November 2025 Monetary Policy Report found that tariffs were having a relatively limited effect on global growth to date, but it is too early to judge whether this reflects diminished or merely delayed effects of trade policy changes.

Respondents to the Bank’s latest Systemic Risk Survey - 2025 H2, covering a range of financial institutions, cited geopolitical risk as the second largest systemic threat to the UK financial system, behind cyberattacks.

Against this uncertain backdrop, the appropriateness of financial regulation is being debated actively across a number of jurisdictions. Robust regulatory standards and international co-operation are necessary to maintain the resilience of the global financial system, limit regulatory arbitrage, and to prevent and respond to shocks in order to support sustainable economic growth over the long term.

In the FPC’s judgement, many risky asset valuations remain materially stretched. This heightens the risk of a sharp correction.

Stock market volatility has fallen since April, and has recently been below its long-term average. Some risky asset prices across advanced economy corporate bond and equity markets have increased since the July FSR, and risk premia across many risky asset classes remain compressed by historical levels, although have widened somewhat relative to the FPC’s October meeting. Economic policy uncertainty remains high, although it has fallen from the levels seen in April (Chart 2.1).

Chart 2.1: Stock market volatility has fallen while economic policy uncertainty remains high, even though it has fallen since April

Standard deviations above the historical average of the Economic Policy Uncertainty Index and Cboe Volatility Index ^{(a) (b) (c)}

Footnotes

• Sources: Cboe Volatility Index (VIX), Economic Policy Uncertainty Index and Bank calculations.
• (a) The Economic Policy Uncertainty Index is a news-based measure of policy uncertainty in 18 countries.
• (b) The VIX is an index of US equity market volatility derived from the prices of S&P 500 index options expiring inside 30 days.
• (c) Data to the end of September.

Markets do not appear to be fully reflecting the persistent material uncertainty in the global economic and policy environment, and the potential for adverse outcomes. Some risks are difficult to price, either because they are very unlikely to occur or their impacts are highly unpredictable. The risk of a sharp correction remains high. If participants were to reassess their outlook abruptly this could cause asset prices to realign to the prevailing high level of uncertainty.

The risk of a sharp correction sits against a backdrop of rising public debt-to-GDP ratios in many advanced economies, potentially constraining their governments’ capacity to respond to future shocks. Significant shocks to the global economic or fiscal outlook, should they materialise, could be amplified by vulnerabilities in market-based finance (MBF), such as leveraged positions in sovereign debt markets.

Notably, equity market valuations for technology companies focused on artificial intelligence (AI) remain materially stretched. On some measures, equity valuations are close to levels not seen since the dot-com bubble in the US, and the global financial crisis in the UK.

Equity indices, including the FTSE 100 index and S&P 500 index, reached all-time highs in the second half of this year. Equity valuations on some measures (for example the excess cyclically-adjusted price-to-earnings (CAPE) yield) look stretched relative to historical levels across jurisdictions, especially in the US where, on some measures, they are close to levels not seen since the dot-com bubble (Chart 2.2). On a three year forward basis – ie accounting for projected earnings growth over the next three years – excess earnings yield over inflation-protected government bonds in the US is also close to levels not seen since the dot-com bubble.

The equity prices of some large US technology companies focused on AI have continued to increase since the July FSR, although have fallen in recent weeks. The size of these companies has increased concentration in the S&P 500 index to historical highs, with the ‘Magnificent 7’ accounting for over a third of the index.^{footnote [5]}

Chart 2.2: Valuations for a range of risky assets remain at historically stretched levels

Current levels of selected risk premia as a percentile of their historical distribution, compared to levels at the July 2025 FSR and October 2025 FPC meeting ^(a)

Footnotes

• Sources: Bloomberg Finance L.P., Datastream from LSEG, ICE BofAML, PitchBook Data, Inc. and Bank calculations.
• (a) Risk premia data are a percentile of a three-day rolling average (except for leveraged-loan (LL) spreads, which are a percentile of a monthly average). Percentiles are calculated from 1998 for investment-grade spreads and high-yield bond spreads, from 2008 for LL spreads and from 2006 for excess CAPE yields. Data updated to 24 November 2025 apart from LL which is to 14 November 2025. Investment-grade spreads are adjusted for changes in credit quality and duration. All data are daily except for LL spreads which are weekly.

Some of these firms are trading at price-multiples that imply high levels of future earnings growth. Whether these earnings will be realised, or even prove underestimates, is uncertain. These prices are exposed to a sharp correction if the prospects for AI development, or for the companies to monetise and generate profits from the use of AI, are revised. Given the concentration of the market, investors exposed to the aggregate index will face a high level of pass through from any sharp correction in AI-focused firms.

The role of debt financing in the AI sector is increasing quickly as AI-focused firms seek large-scale infrastructure investment. By some industry estimates, AI infrastructure spending over the next five years could exceed $5 trillion US dollars. While very large technology companies (widely referred to as the ‘hyperscalers’) will continue to fund much of this from their operating cash flows, approximately half is expected to be financed externally, mostly through debt. Deeper links between AI firms and credit markets, and increasing interconnections between those firms, mean that, should an asset price correction occur, losses on lending could increase financial stability risks. This is discussed in more detail in Box C.

Corporate credit spreads remain compressed by historical standards, despite continuing macroeconomic uncertainty, including over the impact of higher tariffs on the corporate sector across major economies.

The spread between yields on both investment grade (IG) and riskier corporate borrowing (high-yield bonds and leveraged loans) and yields on safer debt (eg government bonds) have widened marginally since the FPC’s October 2025 meeting across jurisdictions, partly as a response to some high-profile US corporate defaults. However, the level of spreads remains tight by historical standards, especially in the US.

The tight level of spreads contrasts with potentially growing vulnerabilities among corporates in a variety of sectors across advanced economies. Corporates, especially highly leveraged corporates, continue to face challenges as they refinance existing fixed-term debt at higher rates following increases in interest rates over recent years (Section 3). However, tight credit spreads have offset this in part and encouraged higher levels of corporate issuance. Higher debt servicing burdens could put pressure on corporate balance sheets and debt affordability.

In addition, tariffs pose specific challenges for exposed corporate sectors in affected jurisdictions. The imposition of tariffs could potentially lead to lower profits for firms through higher costs on imported goods and lower earnings – through either lower global demand, or in response to higher prices if firms pass the cost of tariffs onto consumers. Sectors that are import and export oriented, such as manufacturing (and car manufacturing specifically) and retail and wholesale trade, are likely to be most exposed to this risk. The impact of tariffs on global growth appears to have been limited to date but it is too early to judge whether this reflects diminished or merely delayed effects of trade policy changes.

In response to two recent high-profile corporate defaults in the US, credit spreads widened slightly but have not materially repriced, suggesting market participants primarily see them as driven by company specific-challenges.

First Brands Group, a major automotive parts supplier, and Tricolor, a provider of loans to subprime borrowers for car purchases, both failed in September. Credit markets have not responded materially to these events: spreads remain tight historically for IG and riskier borrowers in high-yield bond and leveraged loan markets, especially in the US, although spreads for CCC (‘junk’) rated debt have widened relative to other borrowers. This suggests markets broadly see these defaults as driven by company-specific challenges. For example, a proportion of First Brands Group’s supply chain was located overseas and therefore potentially subject to tariffs, and Tricolor specialised in providing credit to subprime borrowers, a segment characterised by relatively high default rates.

While the impact of these specific defaults has been limited, they have intensified focus on potential weaknesses in riskier credit markets previously flagged by the FPC.

These potential weaknesses in riskier credit markets, such as leveraged loans, collateralised loan obligations and private credit, include high leverage, weak underwriting standards, opacity, complex structures, and the degree of reliance on credit rating agencies. These weaknesses illustrate how corporate defaults could impact bank resilience and credit markets simultaneously.

Further defaults could follow if some of these weaknesses are more widespread. Notably, the opacity and complex corporate structures in these two entities may have been a contributing factor that allowed significant alleged fraud to be undetected for a period. In both of these cases, as well as some other recently disclosed losses, there have been reports that the collateral against which lending was secured was misrepresented or even fraudulent. This could be indicative of weaknesses in underwriting standards.^{footnote [6]} The weaknesses exposed by these defaults is discussed in more detail in Section 6.

These defaults also reflect a potential weakening in credit quality among the lower end of the US income distribution. Subprime auto loans, such as those originated by Tricolor, are typically among the first asset classes to experience distress in a deteriorating macroeconomic environment. The US consumer appears resilient in aggregate – the proportion of mortgages in arrears remains relatively low by historical standards and household debt-to-GDP has continued to fall – but there are vulnerabilities among households at the lower end of the income distribution. 90+ day arrear rates on different forms of US consumer credit have increased markedly over the past three years (Chart 2.3).

Chart 2.3: 90+ day arrear rates on different forms of consumer credit in the US have increased

Proportion of balances at least 90+ days in arrears on different forms of US consumer credit ^(a)

Footnotes

• Sources: Equifax and Federal Reserve Bank of New York.
• (a) Arrears on student loan debt increased significantly in the first half of 2025, reflecting the resumption of student loan repayments and reporting of delinquent loans to credit bureaus.

Weakening credit quality is especially prevalent in subprime auto loans, such as those provided by Tricolor. The arrears rate on auto loans by subprime borrowers that have been securitised in asset-backed securities (ABS) has increased sharply over the past few years (Chart 2.4).

Chart 2.4: Share of subprime auto ABS loan balances 60+ days in arrears has risen sharply

Proportion of balance on prime and subprime auto loans that have been securitised in an ABS at least 60-days delinquent

Footnotes

• Source: Fitch Ratings Research & Data.

US businesses are facing cost pressures due to the imposition of tariffs, especially in exposed sectors. Bank staff analysis suggests the tariff cost shock is relatively small as a share of total corporate profits across sectors, but represents a significant share of profits in more heavily impacted sectors, particularly within manufacturing.

Default rates on speculative grade debt (leveraged loans and high-yield bonds) in the US have increased and are above pre-Covid levels, but have been broadly stable over the past two years (Chart 2.5).

Chart 2.5: Defaults among riskier corporates have increased in the US

12-month average default rate on speculative grade (high-yield bonds and leveraged loans) borrowing in the US and EU

Footnotes

• Source: Moody’s Ratings.

With sections of the US corporate sector and households facing challenges, further defaults could follow, especially if the economy weakened. If this triggered a wider reassessment of credit quality by global markets, this could lead to higher borrowing costs for UK households and businesses, and lower liquidity in UK corporate bond and leveraged loan markets.

The FPC will continue to monitor these issues, and any potential spillovers to the UK. The Tricolor and First Brands defaults reinforce the need for market participants to have a clear understanding of their exposures and ensure that underwriting standards are robust.

While the impact of – and UK banks’ direct and indirect exposures to – these specific defaults has been limited, a diverse range of financial market participants were exposed. Such diversity can help absorb risks, but opacity around the extent of exposures, and their possible interconnections, can also create uncertainty about how widely shocks in credit markets can propagate. It is important that market participants have a clear understanding of their exposures, including in stress scenarios where correlations and losses can shift outside historical norms. Market participants should also ensure that underwriting standards are robust and that they do not over-rely on credit ratings as a substitute to carrying out appropriate due diligence.

If the defaults of First Brands and Tricolor prompted a wider reassessment of credit risk in the US, then this could spillover to the UK and harm the availability and pricing of credit for the UK real economy, with higher spreads and a tightening of credit conditions for lower quality credit in particular.

While the risk of a spillover exists, the FPC judges the UK household and corporate sectors remain resilient in aggregate. Measures of household and corporate indebtedness remain significantly below pre-Covid levels, consumer credit debt servicing ratios remain low, and the share of consumer credit loans in arrears has remained largely stable. Lending spreads in the UK, although still relatively compressed by historical standards, are less compressed than in the US. However, there are pockets of risk among some households, SMEs, and highly leveraged corporates. The resilience of the UK household and corporate sectors is discussed in Section 4.

2.2: Global public sector debt vulnerabilities

Public debt-to-GDP ratios in many advanced economies have continued to rise this year.

There has been a long-term upward trajectory in public debt-to-GDP ratios across advanced economies in recent decades and significant further increases are expected for some economies in coming years (Chart 2.6).

Governments globally face spending pressures, given the context of changing demographics and geopolitical risk, potentially constraining their capacity to respond to future shocks. Significant shocks to the global economic or fiscal outlook, should they materialise, could be amplified by vulnerabilities in MBF, such as leveraged positions in sovereign debt markets.

Chart 2.6: Debt-to-GDP ratios are projected to continue to increase

Sovereign debt (percentage of GDP) ^(a)

Footnotes

• Sources: International Monetary Fund (IMF) and Workspace from LSEG.
• (a) Use of IMF Content and Data is subject to the IMF’s terms of Copyright and Usage.

Some countries have faced political uncertainty and change over the level and pace of reforms to improve fiscal outlooks.

France is experiencing challenges agreeing its 2026 Budget. Japan’s incoming administration has announced it intends to introduce additional fiscal spending and will target an overall debt-to-GDP ratio, rather than the budget deficit.

The IMF projects that public debt-to-GDP in China is on an upward trajectory. The IMF’s broader measure of China’s government debt which captures some off-balance sheet debt, such as that held by local governments and associated with their funding vehicles, is forecast to rise to 153% of GDP by 2030. Support for local government finances was announced last November, which brings some local government debts onto balance sheets and reduces financing costs, but local government fiscal pressures remain elevated amidst weak revenue growth. These reforms may act to reduce fiscal space in China, potentially reducing the Chinese government’s ability to respond to an economic slowdown.

Continuing adjustment to the property market slowdown and potential economic headwinds from tariffs could drag on the Chinese economy in the coming years. In mainland China the pace of the decline in house prices has increased in recent months, following a stimulus-driven moderation at the start of the year. Given the size and globally interconnected nature of the Chinese economy, this could have potential adverse impacts on global trade and growth and financial markets.

Yields on developed market long-term government bonds have risen over recent years reflecting interest rate increases and higher term-premia, as concerns about the sustainability of fiscal deficits globally remain in focus.

Long-term yields remain elevated relative to recent history (Chart 2.7). This reflects both the increase in interest rates seen across economies since the pandemic and increases in term premia as investors demand a greater premium for holding bonds with longer-term maturities.

Market participants attribute these shifts in global term premia to a combination of factors, including evolving supply and demand dynamics for longer-dated government securities and heightened market scrutiny of the long-term sustainability of fiscal positions.

Since the July FSR, however, yields on 10-year government bonds across jurisdictions have not moved materially. UK 10-year government bond yields initially rose, reaching 4.71% at the time of the FPC’s October meeting, before subsequently declining to 4.54%, close to their July level. This fall reflects both reduced term premia and expectations for interest rates. Yields on US 10-year government bonds exhibited a similar trajectory and now sit below their July levels. 10-year government bond yields in France and Germany are also around their level at the time of the July FSR.

Chart 2.7: Long-term (10-year) government bond yields have risen over recent years reflecting interest rate increases and higher term-premia.

US, UK, French and German 10-year government bond yields ^(a)

Footnotes

• Source: Bloomberg Finance L.P.
• (a) Data as at 24 November 2025.

There are a number of channels through which pressure on sovereign debt could impact UK financial stability.

As explored in the November 2024 Financial Stability Report, there are a number of channels through which pressures on sovereign debt globally could affect UK financial stability. These include: increased market volatility and possible interactions with vulnerabilities in MBF; the reduced ability of governments to respond to future shocks; higher interest rates leading to tighter global financial conditions; and the potential for capital outflows from non-resident investors.

As an open economy with a large financial centre the UK is exposed to global shocks, which could transmit through multiple, interconnected channels. Stress in one market, such as a sharp asset price correction or correlation shift, could spillover into other markets. Simultaneous derisking by banks and non-banks can lead to fire sales, widening spreads and tightening financing conditions for UK households and corporates. Market participants should ensure their risk management incorporates such scenarios.

A number of jurisdictions are seeing a longer-term shift in the composition of buyers for their sovereign debt. Historically, pension funds have been large buyers of longer-term government bonds, but have played less of a role in recent years as higher interest rates improve their funding ratios, and an ageing population may encourage funds to shift toward shorter-term assets to ensure liquidity for paying current benefits. In contrast, multinational non-bank financial institutions such as hedge funds are playing an increasing role. Hedge funds have had a sizeable presence in US and UK government bond markets for a number of years. Analysis published in the latest Bank of Japan Financial System Report highlighted that the presence of hedge funds engaging in arbitrage trading in the Japanese government bond market appears to be growing.

In normal times, hedge funds serve a useful function by warehousing risk and intermediating between different types of market participants, thereby improving market liquidity and price discovery, but their use of leverage introduces risk. Leveraged market participants employ strategies which can be vulnerable to shifts in financing conditions or increases in margin requirements. This can cause them to reduce risk, potentially amplifying volatility during periods of stress. Correlations between movements in yields across sovereign issuers – in part reflective of the presence of similar investors across different markets – could act to transmit and amplify stress in government bond markets. As an open economy and global financial centre these risks could have a material impact on the UK. The resilience of the UK gilt and gilt repo markets are discussed in Section 6.

3: UK household and corporate debt vulnerabilities

Financially resilient households and corporates play a key role in supporting economic growth in the UK.

A stable financial system, with resilient households and corporates, is a key factor in supporting sustainable economic growth (Section 1). Household savings and corporate investment help drive productivity growth. And highly indebted households and businesses may cut back sharply on consumption, investment, or employment to make debt repayments, worsening economic downturns. The most indebted can default, leading to losses for lenders.

By stress testing banks to ensure they have sufficient capital to absorb significant losses on their household and corporate loans while continuing to lend (Section 5), and through its policy on high loan to income (LTI) mortgages, the FPC aims to reduce risks to financial stability from UK households and corporates and so support economic growth.

3.1: Overview of UK economic developments

The outlook for UK growth over the coming year is a little stronger than it was at the time of the July FSR but remains subdued.

In the November Monetary Policy Report (MPR), annual real UK GDP growth was projected to be marginally stronger on average over the next three years than expected in July but remains subdued. While global trade policies and elevated global uncertainty still weigh on medium-term prospects for growth, the global economy has been more resilient to trade developments than expected. The UK labour market has softened, and UK unemployment has reached 5%, where it was expected to peak in 2025 Q4 – before gradually falling back to 4.7% by 2028 Q4. The growth rate of nominal household incomes was slightly stronger in 2025 Q2 compared to Q1, whereas corporate earnings reduced.

At the time of the November MPR, market pricing implied that Bank Rate was expected to be around 3.5% in a year’s time, slightly lower than expected in July. In line with the latest developments in monetary policy and a competitive mortgage market, quoted mortgage rates have continued to decrease. And continuing the trend from July, the growth in mortgage market lending has risen to 3.2% year on year, above the post-global financial crisis (GFC) average of 2.2%. Effective rates on new bank lending to corporates have also decreased, with rates for private non-financial corporates declining 14 basis points from August to September.

3.2: UK household debt vulnerabilities

Measures of indebtedness suggest that UK households remain resilient in aggregate.

Aggregate measures of UK household indebtedness have continued to fall since the July FSR. The aggregate debt to income ratio remained low at 132% in 2025 Q2, having fallen to its lowest level since 2002. The share of household income spent on mortgage repayments (debt-servicing ratio (DSR)) was flat at 7.3% in Q2 and is expected to remain around this level over the coming years. Sensitivity analysis by Bank staff shows that it would take a very severe shock to incomes and mortgage spreads for aggregate household DSRs to reach historic peaks (Chart 3.1).

Chart 3.1: It would take a large decrease in incomes and increase in lending spreads for household DSRs to reach GFC peaks

Aggregate household mortgage DSR and staff projections under a central and stressed scenario ^{(a) (b) (c)}

Footnotes

• Sources: Bank of England, Bloomberg Finance L.P., FCA Product Sales Data, ONS and Bank calculations.
• (a) Calculated as mortgage interest payments plus principal repayments as a proportion of nominal household post-tax income. Household income is defined as disposable (post-tax) income adjusted for changes in pension entitlements, which is adjusted to exclude gross operating surplus and the effects of financial intermediation services indirectly measured, and to add back interest paid. Mortgage interest payments before 2000 are adjusted to remove the effect of mortgage interest relief at source.
• (b) The illustrative projections to end-2027 use projections for household post‑tax income consistent with the November 2025 MPR forecast. Payment increases are projected using market expectations for Bank Rate based on the overnight index swap (OIS) curve as of 24 November 2025 taking into account the distribution of fixed-deal terms from the FCA Product Sales Data and assuming the aggregate mortgage debt to income ratio remains constant.
• (c) The stressed projection is designed to illustrate the sensitivity of the aggregate household DSR to severe shocks. It assumes both a cumulative 5% fall in disposable (post-tax) household incomes by the end of 2027 – a little larger than in the GFC – as well as a 300 basis points increase in mortgage spreads, which passes through to mortgage borrowers with a lag. The household income measure is adjusted as in the central projection.

The share of households in arrears or with high debt-servicing burdens remains low by historical standards. Aggregate consumer credit DSRs remain low at around half pre-GFC levels and the share of consumer credit in arrears has remained relatively stable at 1.2% in 2025 Q3. The proportion of all households with high mortgage DSRs (defined as DSRs over 40%) was 1.6% in 2025 Q3. This share is expected to remain well below its pre-GFC peak and slightly above projections at the time of the July FSR.

Consistent with this, the rate of mortgage arrears, which was 0.9% in 2025 Q3, is expected to remain well below its early 1990s and post-GFC peaks. The number of homes repossessed by banks increased this year, reaching around 6,100 homes by the end of 2025 Q3 compared to 4,200 at the end of 2024 Q3, although repossession rates remain very low by historical standards at 0.06% of all loans.

The aggregate household savings to income ratio remains elevated, increasing households’ resilience to potential future shocks. However, some groups are more vulnerable to economic shocks than others. Evidence from the NMG survey finds that the gap in median savings to income between outright owners and renters has widened over 2025. While falling rental price inflation is likely to somewhat ease pressures on renters, renters also continue to be more likely to report financial difficulty and insufficient emergency savings. Around 35% of households are renters, so sharp spending cuts or defaults on their financial obligations in the event of economic shocks can pose financial stability risks.

Borrowing costs have decreased following recent reductions in Bank Rate. But there are still some households that are expected to face higher mortgage payments over the next three years.

Since interest rates started to rise in 2021 H2, many mortgage accounts have refixed onto higher rates. Previous and expected falls in Bank Rate will lead to decreasing mortgage payments for households on variable rates and for households that are currently fixed above prevailing rates. A third of mortgage accounts (three million households) are expected to see payments decrease in the next three years, similar to expectations at the time of the July FSR.

However, some households are expected to see an increase in mortgage repayments, as the full impact of higher interest rates has not yet passed through to all mortgagors. In total, over the next three years, 43% of mortgage accounts (3.9 million) are expected to refinance onto higher rates. On balance, for the typical owner-occupier mortgagor rolling off a fixed rate in the next two years, their monthly mortgage repayments are projected to increase by £64 (8%), with some households facing much larger increases.

Lenders have been adjusting their behaviours following the clarification of the FCA Mortgage Conduct of Business (MCOB) rules and the changes in the FPC recommendation for the loan to income flow limit, but the full impact of these policy changes is still passing through to the mortgage market.

The FPC has set out a recommendation for a 15% aggregate flow limit on new UK mortgage lending to borrowers with high LTI ratios (at or greater than 4.5). This measure provides insurance against a marked and unsustainable loosening in underwriting standards and a further significant increase in the number of very highly indebted households. In addition to the FPC’s LTI flow limit, the Financial Conduct Authority (FCA) also has Responsible Lending rules to protect consumers from unaffordable mortgage debt. While these measures and rules have different objectives, both reduce risks to financial stability that could arise from the mortgage market. The FPC measure and FCA rules have helped keep aggregate DSRs and arrears below the levels seen during the GFC, even in the recent period of rising interest rates.

The FCA published a clarification in March 2025 around the stress rate component of its MCOB rules. In addition, the FPC updated its Recommendation to the Prudential Regulation Authority (PRA) and FCA in Q2 to ensure the LTI flow limit is implemented proportionately. This amendment allows individual lenders to increase their share of lending at high LTI ratios while aiming to ensure the aggregate flow remains consistent with the limit of 15%. Consistent with the FPC’s update, the PRA has provided an interim modification by consent that allows approved lenders to disapply the 15% LTI flow limit in PRA rules with immediate effect. This adjustment in requirements allows individual lenders more flexibility to go above the 15% limit in line with their own risk frameworks and subject to the aggregate level across all lenders remaining consistent with the 15% limit.

It remains too early to assess the full impact of these policy changes on the mortgage market. However, several major lenders have already changed their behaviour in response to the MCOB statement, in part driving a fall in median stress rates on Q3 completions of around 100 basis points since Q1. Consistent with this, indicators from the Credit Conditions Survey – 2025 Q3 and market intelligence point to a higher supply of credit to households. And net mortgage approvals hit a nine-month high in September, returning to the pre-Covid average (Section 4). The share of high LTI lending increased to 9.5% in Q3, in line with Q1 and up from 7.6% in Q2, which was depressed by the end of the stamp duty land tax holiday. This leaves the four-quarter rolling average at 8.7%, well below the 15% limit (Chart 3.2). The FPC will continue to monitor the effect of the policy changes on the housing market.

Chart 3.2: High LTI lending increased in 2025 Q3

The share of new lending at ≥4.5 LTI ^{(a) (b) (c)}

Footnotes

• Sources: FCA Product Sales Data and Bank calculations.
• (a) The FPC’s flow limit applies on a four-quarter rolling average basis.
• (b) Range of lenders’ share of lending at greater than or equal to 4.5 LTI (four-quarter rolling average) constructed using the weighted 10th to 90th percentiles of firms’ use of their individual flow limits and shown from the introduction of the FPC’s flow limit in 2014 Q4.
• (c) The sample includes only all new mortgages for house purchases and external remortgages with a change in principal.

While looser credit conditions allow additional borrowers to enter the market in the near term, staff analysis suggests that, unless there is also an increase in housing supply, increased credit availability has limited ability directly to address barriers to home ownership. The FPC supports initiatives to explore increases in the supply of housing and greater access of creditworthy households to mortgages, including at higher loan to values (LTVs).

The FPC judges that, in aggregate, households remain resilient. It would take significant falls in household incomes and rises in interest rates for the aggregate debt-servicing burden to rise materially.

Staff scenario analysis suggests that it would take a substantial shock to both incomes and lending spreads for the aggregate mortgage DSR to reach its GFC peak. Therefore, the FPC expects UK households to remain resilient in aggregate. The results of the 2025 Bank Capital Stress Test suggest that UK banks would have capacity to continue supporting household lending even if economic conditions turn out materially worse than expected (Section 5).

3.3: UK corporate debt vulnerabilities

Measures of indebtedness suggest UK corporates remain resilient in aggregate. And the share of vulnerable corporates has remained steady compared to Q2, well below historical peaks.

The corporate net debt to earnings ratio ticked up slightly in 2025 Q2 as net debt increased and profits fell slightly. At 134%, the aggregate ratio remains well below Covid (166%) and post-GFC (230%) highs, reducing the risk that indebted corporates would materially amplify a shock relative to the past. However, this aggregate picture can mask vulnerabilities within particular companies and sectors. Despite global uncertainty (including from the US credit market), historically tight credit spreads mean that current funding conditions are benign. But a sharp correction could constrain refinancing options for UK corporates.

The share of highly indebted corporates that would struggle in the event of an income or interest rate shock has remained largely stable compared to the July FSR. Both the debt-weighted proportion of corporates with low interest coverage ratios (ICRs), and the Bank’s broader corporate debt at risk measure remain well below historical peaks (Chart 3.3). Sensitivity analysis by Bank staff shows that it would take a very severe shock to funding costs and corporate earnings to reach historic peaks.