Bank of England Financial Policy Committee Members Voice Concern on Trimming Lenders’ Financial Buffers
The Bank of England is planning to loosen capital requirements for major UK lenders, despite policymakers expressing concern about the threat to financial stability posed by rapid AI developments and debt-fuelled stock investments.
The central bank announced on Tuesday that it is considering removing and relaxing some rules introduced after the 2008 financial crisis. These rules determine the size of the financial cushion required to absorb losses and protect consumers and taxpayers when financial institutions face difficulties.
The Bank’s Financial Policy Committee (FPC) indicated that the plans include scrapping a longstanding buffer within the so-called leverage ratio. This change would primarily benefit the largest UK domestic-focused banks and building societies, such as NatWest, Lloyds, Nationwide, and Santander UK.
Current proposals, which will be released for consultation, could reduce those lenders’ leverage ratio by an average of 20 basis points. This adjustment aims to provide these banks with a competitive advantage against international peers and encourage additional lending that supports the broader UK economy.
However, some committee members have expressed concerns that reducing these buffers could exacerbate existing risks to the financial system.
For instance, a new wave of lending might increase the number of loans extended to investors, including hedge funds, who have already employed substantial debt to purchase company shares on the stock market.
Much of this debt-fuelled investment has targeted AI-related stocks, whose valuations have been notably volatile.
“Some FPC members were concerned that the proposal might lead to an unwanted increase in market-based leverage, with implications for the resilience of core UK markets,”
a report by the committee stated.
The FPC is now initiating a review to
“identify whether the proposal would leave any financial stability gaps that would need to be managed and whether this justified further adjustments to the policy package”.
This review is expected to be completed by the end of September and will influence the capital changes proposed for consultation in early 2027.
Meanwhile, the FPC has raised additional concerns about developments in artificial intelligence, which have advanced much more rapidly than some experts had anticipated. While frontier AI systems have the potential to enhance productivity, they also pose new risks.
Specifically, these systems could enable malicious actors to inflict shocks and outages at lower costs and on a larger scale, potentially impacting banks and systemically important financial firms and thereby putting the wider financial system at risk.
“Recent rapid advances in frontier AI capabilities have increased financial stability risks related to cyber and operational resilience,”
the Bank said.
This warning comes amid months of speculation and caution regarding the impact of AI technologies, which have only been deployed to select vetted companies worldwide.
