The Bank of England has delivered a stark warning about escalating dangers to the global financial system, even as it announced a significant easing of capital rules for British banks.
Global Threats and Domestic Resilience
In its latest assessment, the central bank stated that risks to financial stability have increased during 2025. It pointed to a persistently uncertain global macroeconomic outlook, driven by geopolitical tensions, the fragmentation of international trade and financial markets, and mounting pressures on sovereign debt.
The Bank emphasised that the UK, as an open economy with a major financial centre, remains highly exposed to worldwide shocks that can spread through multiple, interconnected channels.
AI Bubble and Private Credit Concerns
The Financial Policy Committee (FPC) reinforced its earlier cautions about a potential bubble in artificial intelligence. It concluded that valuations for many AI-related equities remain materially stretched.
A key warning focused on the sector's growing dependence on debt. The Bank noted that deeper links between AI firms and credit markets, alongside increasing interconnections among the companies themselves, mean that a sharp correction in asset prices could lead to significant lending losses and threaten financial stability.
Private credit was flagged as another major area of vulnerability. The committee cited the recent collapses of First Brands and Tricolor as events that had intensified focus on potential weaknesses in this market. Turbulence in private credit contributed to one of the FTSE 100's worst trading days of the year in October, triggering substantial declines for UK bank shares.
Regulatory Shift: Capital Requirements Lowered
Despite these warnings, the Bank has acted to reduce the regulatory burden on lenders. Following lobbying from industry body UK Finance, which argued that the sector was holding up to £54bn in excess capital, the FPC has decided to lower the benchmark.
The Common Equity Tier 1 (CET1) capital requirement for UK banks will be reduced to 13 per cent from 14 per cent. This buffer, comprised of a bank's own funds that don't need repaying, is designed to absorb unexpected losses and protect customers and the wider system.
This move is seen as a major step in the Treasury's deregulation agenda. Experts believe its impact could be more substantial than the Leeds Reforms package announced by Chancellor Rachel Reeves earlier this year, potentially freeing billions of pounds for banks to lend into the economy.
Karim Haji, Head of Financial Services at KPMG, commented: "Regulations need to be robust but proportionate and UK banks have huge pools of capital. The recommendation to update the CET1 benchmark is a helpful step towards maintaining the UK's resilience whilst also being supportive of growth."
The change aligns with calls from banking leaders. HSBC Bank Chief Executive Michael Roberts told a House of Lords session that reviewing how capital is measured was crucial to prevent UK banks from facing a competitive disadvantage, particularly against US rivals.
