UK Bank Rules Get Looser—While New Risks Emerge

The Bank of England has decided to remove a safety cushion built into how much capital the largest UK banks have to hold in reserve. The change would mainly help NatWest, Lloyds, Nationwide, and Santander UK, according to records from the Financial Policy Committee's 26 June 2026 meeting, made public on 7 July The Guardian.

On average, the affected banks could free up around 20 basis points of capital—roughly 0.2 percent—under this change. To understand why that matters, it helps to know what the leverage ratio does: it measures how much of a bank's actual capital backs up its total lending and investments, unweighted by risk. Think of it as a safety net underneath the more complicated rules that decide how much capital banks need to set aside for different types of loans. Removing the buffer lets banks deploy that freed-up capital toward new lending.

The Bank of England's own reasoning is clear: these capital buffers were always meant to be used during financial stress, not sit permanently untouched Bank of England. The committee is framing this as part of a broader overhaul of the post-2008 capital rules, the framework built after the financial crisis to keep banks safer Bank of England.

The Wrinkle: Dissent Over Side Effects

Not everyone on the committee agreed. Some members worried aloud that loosening rules for banks might accidentally push leverage—borrowing to amplify gains—into less-regulated corners of the financial system. Specifically, they flagged hedge funds taking on debt to chase AI stock valuations The Guardian. That concern points to a bigger problem the committee identified: rapid progress in artificial intelligence itself has become a financial stability risk.

The Bank of England noted that AI capabilities have advanced faster than experts predicted, which means bad actors can now damage financial infrastructure more cheaply and at larger scale. The committee specifically mentioned Anthropic's Mythos model—a cutting-edge AI system currently available only to a handful of vetted companies worldwide—as an example of how quickly these risks are outpacing the industry's ability to assess them The Guardian.

The Tension

The committee's position reads as holding two truths at once: that banks need more usable capital, and that leverage and AI-enabled threats are building up elsewhere in the financial system. Here's where the tension becomes apparent. Capital buffers were designed after the 2008 crisis to act as shock absorbers—to cushion the banking system when crises hit. Relaxing those buffers on the grounds that they're underused, while simultaneously warning that risk is migrating to less-supervised hedge funds and AI-related vulnerabilities, suggests the regulator is watching two different games at different speeds. The traditional banking system moves at one pace; the AI market and leveraged non-bank actors move much faster—and the rules aren't keeping up equally.

The Bank of England has launched a review to look for gaps the capital rule changes might create, with findings due by the end of September 2026. That work will then feed into a formal consultation process expected to begin in early 2027 Bank of England. This gives the regulators about three months to think through second-order effects—including the leverage buildup some committee members raised—before moving to the next stage of rule-making.

There's one more piece to the backdrop: Katharine Braddick took over as head of the Prudential Regulation Authority (the Bank of England's supervisory arm) on 1 July 2026, just days before this capital-rule record was published Bank of England PRA Annual Report. New leadership is also updating the Bank's stress-testing framework—the scenario-based tools used to check whether banks can survive financial shocks. It's unclear whether AI-related risks, including cyber threats, will be explicitly built into future stress tests.

What Happens Next

For banks, the near-term payoff is clear: more capital available to lend, once this rule change takes effect. For the regulator, the harder work lies ahead. The September review will need to answer whether loosening bank-level buffers is actually safe—or whether it only works if paired with tighter oversight of the leverage piling up outside the banking sector, in hedge funds chasing AI returns and in the growing operational vulnerabilities that more capable AI systems might exploit.