FPC review of UK bank capital – summary of stakeholder evidence gathering event

Executive Summary

• The discussion included the overall calibration of bank capital requirements in the UK, as well as the areas identified by the FPC for further work in December, which were: the usability of buffers, the functioning of the leverage ratio framework; and the interactions between different elements of the capital stack, particularly in relation to domestic exposures.
• Some participants argued that heightened macroeconomic and geopolitical uncertainty, alongside reduced fiscal headroom globally, pointed towards maintaining or increasing the FPC’s bank capital benchmark, rather than reducing it. Others argued that the banking system’s performance through recent shocks, as well as Bank of England stress test results, demonstrated that capital requirements could be reduced without undermining resilience, reflecting the effectiveness of post financial crisis reforms.
• There were a range of views on what the macroeconomic impact of a reduction in bank capital might be. Some argued that increased distributions would support activity and increase the attractiveness of the UK to investors, and thought that lower capital would reduce the cost of lending to the real economy. Others argued that lower capital would not necessarily be associated with lower bank funding costs and greater lending, noting that capital was not currently a constraint on the supply of credit for most sectors.
• Participants highlighted that regulatory requirements do not determine banks’ capital positions in isolation. Investors and other participants indicated that market discipline, including expectations from investors, creditors and rating agencies, played a significant role in shaping banks’ target capital levels, with more highly capitalised banks relative to peers often having higher equity prices. In itself, the reduction in the FPC’s capital benchmark, announced in December 2025, was expected to have limited impact on banks’ desired capital positions.
• The risk appetite of banks’ boards was a key driver of perceived buffer usability and desired management buffers and capital targets, with limited tolerance for breaching regulatory requirements, even in stress.
• Investors and rating agencies assessed banks’ capital positions relative to their peers and being perceived as operating relatively close to regulatory requirements or approaching effective ‘maximum distributable amount’ (MDA) thresholds – beyond which the distribution of profits would be restricted – would be viewed negatively by the market. Participants also noted a lack of understanding about the operation of MDA rules on the part of some investors. As a result, banks had incentives to maintain headroom above regulatory triggers, and to maintain comparable capital levels to peers.
• Related to these determinants of banks’ incentives, regulatory uncertainty was cited. For example, there was uncertainty about future Pillar 2a requirements and PRA buffers, and about the supervisory reaction function after regulatory buffers are breached. Notwithstanding the barriers to buffer usability discussed, UK banks held smaller buffers above regulatory requirements than peers in jurisdictions with lower countercyclical buffer (CCyB) resting rates. Observed differences in management buffers could be interpreted as indicating that markets expected UK banks would able to use around 120 basis points more of their regulatory buffers in a stress than other European banks.
• Although there were no “silver bullets”, suggested measures that could help reduce desired buffers and make them more useable included: reducing the point in the capital stack at which MDA restrictions apply; making more of the regulatory buffers in the capital stack releasable buffers (ie buffers that can be set to zero); and having more reassurance on the supervisory reaction function after buffers are released or breached.
• Some argued that strengthened supervision, improved risk management and resolution reduced the need for a leverage ratio backstop to risk-based capital requirements. Others emphasised that risk measurement remains imperfect, meaning the leverage ratio continues to play an important role.
• There was a concern that, as the banking system had moved into assets with lower risk weights, the leverage ratio may be operating as a binding constraint for a number of lenders in practice, rather than the backstop that it had been intended to be. This was influencing capital allocation and potentially reducing risk sensitivity. Others noted that if the FPC were to reduce the leverage ratio requirement further, this would incentivise more low risk-weighted business, such as repo lending to non-bank financials, rather than encourage riskier but growth-supporting bank lending to the real economy.
• Some participants argued that aspects of the UK’s implementation of the leverage ratio requirement, including around capital quality rules, the role of leverage buffers and stress test interactions, created tougher leverage-based capital requirements than in other jurisdictions. Others supported maintaining a robust leverage framework, and noted the macroprudential importance of buffers in absorbing shocks.
• Participants broadly agreed that strong overall capitalisation remains essential but differed on whether the cumulative calibration of requirements and buffers related to domestic exposures remained proportionate.
• Some participants argued that the calibration of multiple capital requirements that apply to UK exposures — including Pillar 2A geographic concentration add-ons, other systemically important institution (O-SII) buffers and the UK portion of the CCyB — were highly correlated resulting in some overlap in risks that were being capitalised, in turn this affected the pricing of UK-focussed lending.
• Others emphasised that different components of the capital stack target different risks even if they are correlated, and that the UK economy is particularly susceptible to the impact of macroeconomic shocks. There was little evidence, that capital was a constraint on the supply of lending to the real economy in general, and that while lower capital requirements might help some lenders focused on increasing SME lending to grow, there were a range of factors not primarily related to capital weighing on SME bank lending volumes.
• The evidence gathered will supplement other evidence submitted in response to the FPC’s bank capital review, for which the comment period ended on 2 April 2026. A summary of the evidence gathered will be published in the July FSR.

Purpose

On 20 March 2026, The Bank of England hosted an event to gather evidence from a range of stakeholders on the Financial Policy Committee’s (FPC’s) assessment of the appropriate level and structure of bank capital requirements in the UK.

In its December Financial Stability in Focus (FSiF) publication, the FPC set out its updated assessment of the appropriate overall level of bank capital and identified a number of areas of the capital framework for further assessment. These areas included the usability of regulatory buffers, the functioning of the leverage ratio framework, and proportionality and complexity in the capital framework, including interactions between different elements of the capital stack related to domestic exposures.

The purpose of the event was to support this next phase of the review by gathering evidence-based views from a broad range of stakeholders. The discussions were intended to help ensure that all relevant evidence is brought to bear as the FPC considers how the capital framework can remain effective, efficient and proportionate in meeting its financial stability objectives.

Insights from the event will complement evidence received through written submissions and other engagement, and will inform the FPC’s ongoing work, including future updates on the review.

Discussion summary

Overall capital requirements and international comparisons

Participants broadly agreed that strong bank capitalisation remains central to financial stability and that post-crisis reforms, including resolution regimes in the UK and internationally, have materially strengthened the resilience of the banking system.

Views diverged on the FPC’s benchmark level of capital for the UK banking system, with the committee having reduced its Tier 1 system-wide benchmark by one percentage point to 13% in December 2025. Some participants argued that heightened macroeconomic and geopolitical uncertainty, alongside reduced fiscal headroom globally, pointed towards maintaining or increasing bank capital requirements, rather than reducing them. It was also noted, as set out in the FPC’s December assessment, that the FPC’s benchmark lies towards the lower end of estimates of the optimal level of capital in several academic studies. Others argued that the banking system’s performance through recent shocks, as well as Bank of England stress test results, demonstrated that capital requirements could be lower without undermining resilience, reflecting the effectiveness of post financial crisis reforms. They also questioned whether the growth of non-bank finance would provide a stable source of funding for the real economy.

Participants expressed differing views on the role of resolution frameworks in the assessment of appropriate capital requirements. Some cautioned against relying heavily on resolution to justify lower capital, citing recent international episodes of banking stress in which they observed that some authorities intervened extensively outside of formal resolution regimes. Others emphasised that resolution arrangements, which were now fully operational, were materially more credible than in the past. This made the system more resilient to stress, so it was appropriate to continue to reflect this fact in assessments of capital needs.

There was broad agreement that international consistency in capital frameworks was important, particularly for globally-active banks, and to support the functioning of financial markets. Some participants expressed concern that UK banks could face competitive disadvantages relative to international peers if capital requirements were materially higher than those in other major jurisdictions, especially as international regulators review their frameworks. Attendees noted that US authorities had released their Basel 3.1 proposals shortly before the event and were still processing its implications, although it was clear that the proposals would, in general, reduce the degree to which US capital requirements exceeded international standards. Others cautioned against placing excessive weight on international competitiveness considerations, particularly for ringfenced and domestically-focused banks, emphasising the large social and macroeconomic costs of financial crises.

Participants also highlighted that regulatory requirements do not determine banks’ capital positions in isolation. Market discipline, including expectations from investors, creditors and rating agencies, plays a significant role in shaping banks’ chosen capital levels (See section on buffer usability below for further detail). Investors and ratings agency representatives noted that should banks choose significantly lower capital levels, that could have the effect of triggering ratings re-assessments and impact debt funding costs, and that banks with stronger capital positions relative to peers often had higher equity prices.

Given that the reduction in the FPC’s capital benchmark largely mirrored expected changes in capital requirements as a proportion of risk-weighted assets, which themselves would have little impact on nominal capital requirements, several participants noted that they did not expect banks to change their stated target levels of capital as a result of the FPC’s change in benchmark.

To the extent that the banks did reduce their target capital levels as a result of actions taken by the FPC – either due to the change in the Committee’s benchmark or future any adjustments to the capital framework – there were a range of views as to what that might mean for the real economy:

• Some participants noted that lower capital targets may be reached through larger distributions to bank shareholders, which included pension funds and households who could in turn support the economy. It was also argued that any cut in capital requirements would create capacity for re-investment in business growth with a view to increasing returns to shareholders over time. Increased distributions might also support the attractiveness of the UK to investors.
• Even if lower capital requirements were reached through distributions to shareholders, the ongoing cost of borrowing for households and businesses would still be reduced as banks would have to fund that borrowing with less equity funding, which is relatively costly. In turn, this could boost demand for borrowing and economic activity. Others countered that the directional relationship between cost of capital and bank capitalisation levels was not clear cut, and that some academic studies had shown that higher levels of capital were associated with higher lending, as higher levels of solvency reduced overall funding costs and created capacity to expand credit.
• The extent to which banks would expand lending more directly in response to any hypothetical capacity created by lower capital requirements was not clear. It was noted that indicators of UK credit conditions suggested capital was not currently a constraint on the supply of credit for most sectors. The effect of capital on SME lending was discussed, with some arguing that lower capital requirements would allow for faster growth by banks active in this sector. Others noted different factors that were weighing on the volume of SME lending, including the greater profitability of other types of lending from the perspective of lenders and evidence of wariness from SMEs about borrowing from banks. Lower bank capital requirements would not have a significant impact on many of these factors.

Capital buffer usability

Participants discussed why banks typically chose to have buffers of capital above regulatory requirements (used here to mean minimum requirements plus regulatory buffers). Board risk appetite was cited as a key driver of management buffers and capital targets, with boards exhibiting limited tolerance for breaching regulatory requirements, even in stress. Participants also noted that banks did not control the timing of release or required rebuild of regulatory buffers, and that releasable buffers, such as the CCyB, would only be released in response to a system-wide stress, as opposed to idiosyncratic shocks affecting individual banks.

The perceptions of investors and ratings agencies were seen as important in banks’ choices with respect to management buffers. As part of their assessment of banks, investors and rating agencies considered banks’ capital positions relative to their peers, and being perceived as operating relatively close to regulatory requirements or approaching effective ‘maximum distributable amount’ (MDA) thresholds – beyond which the distribution of profits would be restricted – would be viewed negatively by the market. It was noted that some generalist investors did not fully understand the precise operation of MDA rules, which contributed to their wariness about banks approaching thresholds. It was also noted that effective MDA thresholds for domestically systemically important banks were often above headline MDA thresholds because the O-SII buffer was applied at the level of the ring-fenced bank. As a result of these considerations banks had incentives to maintain headroom above regulatory triggers, and to maintain comparable capital levels to peers.

Related to these drivers of banks’ decisions on management buffers, regulatory uncertainty was also cited. For example, there was market uncertainty over the supervisory response to banks using their buffers.. Banks also noted some uncertainty about Pillar 2A outcomes, and future regulatory change more generally.

Finally, it was suggested that at certain points, planned balance sheet growth and acquisitions could also be factors motivating banks’ desire for headroom above regulatory requirements.

The usability of the UK portion of the CCyB and the FPC’s track record on releasing it was seen as a good thing. UK banks held smaller buffers above regulatory requirements than peers in jurisdictions with lower countercyclical buffers, even where overall capital levels were similar. According to one analyst, European banks run with management buffers of c.300bps compared to 180bps in the UK. It was argued that this implied for a given shock, the market expected UK banks to be able to use 120bps more of their regulatory buffers.

Despite this, some industry participants argued that the current 2% resting rate of the UK CCyB was too high relative to other jurisdictions, which, they suggested, put UK banks at a competitive disadvantage. It was noted, however, that UK regulators had acted to offset the impact of the raising the resting rate of the UK CCyB in a way that kept banks’ total regulatory loss-absorbing capacity broadly unchanged.

Although there was consensus that there was “no silver bullet” and that some of the factors set out above were bound to persist, some measures were suggested that might help increase the perceived usability of regulatory buffers and therefore help reduce desired management buffers. These measures included: reducing the point in the capital stack at which MDA restrictions apply; making more of the regulatory buffers in the capital stack releasable; and having more reassurance on the supervisory reaction function after buffers are released or breached, for example around the time to re-build regulatory buffers and around management control in the case of capital resources falling below regulatory requirements.

Some banks argued that if regulators could confidently predict that banks would maintain management buffers, the FPC’s system-wide capital benchmark for requirements could be lower to reflect that. But others noted that from a regulator perspective, it may not be prudent to rely on banks maintaining voluntary buffers, given that firms took a variety of approaches to maintaining such buffers at present.

The functioning of the leverage ratio

There was debate over the extent to which the leverage ratio remained a necessary component of the capital framework. Some argued that strengthened supervision, improved risk management and resolution reduced the need for a non risk-based backstop. Others emphasised that risk measurement remains imperfect, meaning the leverage ratio continues to play an important role. While some noted that the Basel 3.1 output floor on modelled risk-weights meant that the leverage ratio would be less important as a guard rail against risk weight mismeasurement in future, others countered that standardised risk-weights could also be under-calibrated, including in asset classes where there was less historical data on which to base risk weights.

Participants discussed the decline in banks’ average risk weights over time. Banking industry representatives argued that these trends primarily reflected changes in business mix rather than model optimisation. Risk weights for comparable exposures were described as broadly stable or even higher over time, with the rise in mortgage risk weights as a result of hybrid modelling requirements cited as an example.

A recurring theme from some was concern that the leverage ratio may be operating as a binding constraint for a number of lenders, rather than as a backstop. In turn, this could be limiting the capital available for low risk-weight activities such as mortgage lending and making markets in government debt, or more generally reducing risk sensitivity. Others noted that if the FPC were to reduce the leverage ratio further, this would give an incentive for banks to conduct more low risk-weighted business, such as repo lending to non-bank financial institutions, rather than encouraging riskier but growth-supporting lending to the real economy.

Some participants questioned aspects of the UK’s implementation of the leverage requirements, including capital quality requirements; the countercyclical and domestic systemic leverage regulatory buffers; and stress test interactions. It was argued that these created more stringent leverage-based requirements than in other jurisdictions, and meant that more UK banks’ capital allocation decisions were determined by the leverage ratio. Banks also suggested that the FPC and PRA should re-consider the current application of the leverage ratio at a sub-consolidated level.

Others supported the idea of mirroring aspects of the risk-weighted requirements in the leverage framework to ensure a sufficient level of resilience. As such, releasable buffers were useful in the leverage framework as well as the risk-based one, given that some banks’ capital requirements were likely to be determined by the leverage ratio because of their business models.

Capital requirements and buffers related to domestic exposures

Participants broadly agreed that strong overall capitalisation remains essential but differed on whether the cumulative calibration of requirements and buffers related to domestic exposures remained proportionate.

Some participants argued that the calibration of multiple capital requirements that apply to UK exposures — including Pillar 2A geographic concentration addons, O-SII buffers and the UK portion of the CCyB — were highly correlated resulting in some overlap in risks that were being capitalised. They contended that this led to banks having more capital against these risks than justified by historical losses, in particular alongside ringfencing and the UK resolution regime, which were also important mitigants to macroeconomic risks. In turn, this affected the pricing of UK-focussed lending.

International comparisons were cited, and it was suggested that large UK domestic banks faced higher requirements than comparable peers abroad. Banks also suggested that comparable domestic exposure focused capital requirements in the EU were much less highly correlated for similar lenders.

Other participants noted that while arguments could be made about the calibration of individual elements of the capital stack, the FPC’s overall benchmark – which balanced the costs and benefits to GDP growth based on losses in historical crises – still provided an anchor for overall capital requirements that would need to be met across the system. They also emphasised that different elements of the capital stack related to domestic exposures target different risks – concentration risks, systemic risks, and those related to the financial cycle – even if they are correlated, as well as noting that the UK economy is particularly susceptible to the impact of macroeconomic shocks.

Views diverged on whether capital was a constraint on the provision of lending to the UK real economy. Some emphasised that mortgage markets were competitive and bank lending to corporates had been growing strongly, at an annual rate of around 8%. Others argued that the UK economy was under-leveraged, noting that the growth of credit had been weak relative to GDP since the financial crisis and this had contributed to weak productivity growth (see section on overall capital requirements and international comparisons for a summary of the discussion on domestic SME lending).

Next steps

The views shared at this event will form part of the evidence base for the FPC’s ongoing review of the bank capital framework.

The Bank also invited stakeholders to submit written evidence on the issues identified in its December Financial Stability in Focus publication, including those discussed at the event, the deadline for which was 02 April. Evidence received through written responses will complement insights from this event and other engagement with stakeholders.

The Bank will summarise the evidence received and the FPC will provide an update on next steps in its assessment of the capital framework, including progress on the areas identified for further work, in the July 2026 Financial Stability Report (FSR).

Attendance

Attendees included senior representatives from UK and international banks, building societies, investors, rating agencies, market analysts, academic institutions, industry bodies and public authorities, alongside staff from the Bank of England, HM Treasury and other central banks.

Participation reflected the FPC’s aim of engaging with a wide set of perspectives relevant to its review of the UK bank capital framework.

A number of attendees were invited to take part in panel discussions, with panels structured around key areas of focus in the FPC’s capital review. Panel participants were selected to reflect a balance of experience and viewpoints across industry, markets, academia and policy.