Bank of England Considers Easing Capital Rules Amid AI and Debt Risks

The Bank of England is planning to loosen capital requirements for major UK lenders, even as policymakers expressed concern about the threat to financial stability from rapid AI developments and debt-fuelled stock investments.

The central bank said on Tuesday it was looking to remove and loosen some rules introduced after the 2008 financial crisis that determine the size of the financial cushion required to absorb losses and protect consumers and taxpayers when things go wrong.

The Bank’s financial policy committee (FPC) said that included plans to scrap a longstanding buffer within the so-called leverage ratio, in a way that would primarily benefit the largest of the UK’s domestic-focused banks and building societies, including NatWest, Lloyds, Nationwide and Santander UK.

Current proposals, which will be put out for consultation, could slash those lenders’ leverage ratio by 20 basis points on average, helping give them a leg-up against international peers, and spur further lending that supports the wider UK economy.

However, some committee members have raised concerns that trimming those buffers could amplify current risks to the financial system.

A fresh wave of lending, for example, could increase the number of loans to investors, including hedge funds, who have already used a heavy amount of debt to buy company shares on the stock market.

Much of the debt-fuelled investments have been in AI-related stocks, whose valuations have soared in recent months.

“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 said.

The FPC is now embarking on a review that will “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”.

That review, which will be completed by the end of September, will then influence the package of capital changes put forward for consultation in early 2027.

Meanwhile, the FPC raised further concerns about developments in AI, which had developed much more quickly than some experts had forecast. While frontier AI systems had the ability to boost productivity, it increased cyber risks significantly, meaning malicious actors could inflict shocks and outages at lower costs and at a greater scale.

That could hit banks and systemically important financial firms, putting the wider system at risk.

“Recent rapid advances in frontier AI capabilities have increased financial stability risks related to cyber and operational resilience,” the bank said.