Households pay for bank’s capital cuts
The Bank of England is thinning bank safety buffers days after warning that AI-fuelled stock debt could trigger a crash households would pay for.
Households who bailed out the banks in 2008, and who still bank with them today, are the ones who will carry the cost if the next crash lands. On 7 July the Bank of England decided to make that crash more likely to hurt.
The Bank’s Financial Policy Committee used its July Financial Stability Report to set out a plan to loosen the Bank of England’s capital rules for Britain’s biggest lenders, cutting the buffers built after 2008 to stop banks running out of money in a crisis. In the same report, the Bank warned that debt-fuelled, AI-driven stock valuations are stretched and that a sharp correction could hit the financial system hard. It is weakening the safety net in the same breath as warning what might fall into it.
What the Bank actually changed
The headline move is a cut to the leverage ratio, the simplest and toughest of the post-2008 rules because it does not let banks weight down risky assets on paper. The Tier 1 minimum drops from 3.25% to 3%, replaced by a simpler buffer set at just 0.25 percentage points of a bank’s total exposure. Part of that new buffer is “releasable”: in a downturn, regulators can cut it to zero.
The Bank says the change will lower the leverage ratio at Britain’s biggest domestic lenders, NatWest, Lloyds, Nationwide and Santander UK, by around 20 basis points on average. Government bonds held by banks will no longer count towards the leverage calculation at all. Barclays estimates that alone could free up to £150bn for banks to plough into the gilt market.
This is not the first cut. In December 2025 the FPC already lowered the system-wide capital benchmark banks are expected to hold from around 14% to 13% of their risk-weighted assets. July’s leverage ratio change comes on top of that, and on top of a Treasury plan announced in May to ease ring-fencing rules for the five largest banks, projected to unlock £80bn of extra lending. Nobody voted for any of this. It was decided in Threadneedle Street and Whitehall, and it lands on people who bank, save and mortgage through the very institutions being handed the discretion.
The Bank’s own committee is not sure this is safe
This is the part the Bank buried. Its own record from the 7 July meeting states plainly that “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.” The same report says financial vulnerabilities “have in some ways become more pronounced, driven by increased leverage, particularly in equity markets”, and flags that UK banks’ exposure to hedge funds through swaps and margin lending, much of it collateralised against equities, has been climbing.
A large share of that debt-fuelled buying has gone into AI stocks, whose valuations have soared while the companies behind them increasingly borrow to fund the buildout. The FPC’s own language: “Recent rapid advances in frontier AI capabilities have increased financial stability risks related to cyber and operational resilience.” This is not a fringe concern the Bank is dismissing. In October 2025 the IMF joined the Bank of England in warning of an “abrupt” correction in AI-linked equities, with managing director Kristalina Georgieva comparing valuations to the dot-com era, when tech stocks made up roughly 40% of the S&P 500.
To be fair to the Bank, the leverage ratio is a backstop rather than the main constraint most lenders operate under, and the cut is smaller in absolute terms than “gutting the safeguards” would suggest. The Bank also says it will not proceed blind: a review of whether the plan leaves “any financial stability gaps” is due by the end of September, ahead of a formal consultation in early 2027. Releasable buffers, the Bank argues, are designed to be used in a downturn rather than hoarded the way capital was in 2008, when banks froze lending rather than draw down reserves. That argument deserves to be taken seriously. It does not answer why the loosening starts now, months before the review that is meant to check whether it is safe.
Who asked for this
The pressure came from the top of government before it reached the regulator. At Mansion House in July 2025, Chancellor Rachel Reeves told the City that regulation was a “boot on the neck” of business that was “choking off” enterprise, and promised to unwind rules including ring-fencing. Ten months later the Treasury delivered, setting out plans in May to ease ring-fencing for Lloyds, NatWest, HSBC, Barclays and Santander UK. The Bank of England’s July move follows the same direction of travel, and it followed the government’s decision to scrap the cap on bankers’ bonuses.
The banks due to benefit are not struggling. NatWest reported pre-tax profit of £7.7bn for 2025, up 24%, and gave chief executive Paul Thwaite a pay award of £6.6m, up 33%; the staff bonus pool rose 11% to £495m. Lloyds reported pre-tax profit of £6.66bn, up 12%, and paid chief executive Charlie Nunn £7.4m, up 32%; its bonus pool rose 10% to £405m. NatWest is the same institution that existed only because taxpayers bailed it out in 2008 under its former name, Royal Bank of Scotland, and the state only fully exited its stake in 2025. The bank the public rescued is now first in line for looser rules and bigger bonuses, while the FPC’s own members worry aloud about where the extra leverage ends up.
The Bank knows what it doesn’t know
Governor Andrew Bailey used the same press conference to talk about the Bank’s own use of Anthropic’s frontier model, Mythos, and a temporary US export ban on the latest American AI systems, telling reporters access “does tend to differ week by week” and that the Bank is “keen to work with Anthropic” on the risks. It is a strange note to strike days after his own committee flagged AI-linked leverage as a threat to financial stability: a regulator engaging with the frontier of the technology it is meant to be watching, while simultaneously making it cheaper for banks to lend against the assets that technology has inflated.
None of this required a vote in Parliament, a manifesto commitment, or a conversation with the households who will refinance mortgages, keep current accounts and pay the bill if the buffers prove too thin. The Bank of England says it will check for gaps by September. The AI-linked leverage it is worried about is not waiting for the consultation.
