The Bank of England has issued a warning about heightened global risks to financial stability, despite reducing capital requirements for UK lenders.
The central bank said “risks to financial stability have increased during 2025”.
“Global risks remain elevated and material uncertainty in the global macroeconomic outlook persists,” the Bank added.
The Financial Policy Committee (FPC) highlighted geopolitical tensions, the fragmentation of trade and financial markets, and pressures on sovereign debt markets as principal risk factors.
“As an open economy with a large financial centre, the UK is exposed to global shocks, that could transmit through multiple, interconnected channels,” it added, as reported by City AM.
The Bank has also reinforced earlier concerns regarding the potential for an artificial intelligence bubble.
The FPC concluded that valuations of numerous AI equities “remain materially stretched”.
It delivered a stark warning about the increasing reliance on debt financing within the AI sector.
“Deeper links between AI firms and credit markets, and increasing interconnections between those firms, mean that, should an asset price correction occur, losses on lending could increase financial stability risks.”
Private credit has been identified as another significant area of concern, with the Bank highlighting “potential weaknesses”.
The committee pointed to the collapse of First Brands and Tricolor, which it said “intensified focus” on these weaknesses. The Bank has restated concerns that the UK’s open economy means “stress in one market… could spillover into other markets”.
The FTSE 100 experienced one of its most challenging trading days of the year in October during the private credit turbulence, with significant declines across UK banks.
Karim Haji, head of financial services at KPMG, said: “UK Financial Services firms have proved resilient time and again both by regulatory stress tests and real life shocks. But global risks persist.”
He added: “The past year has shown that risks aren’t confined to traditional economic shocks and when an event happens the impacts are felt immediately due to the interconnectedness of the financial system and technology.”
Meanwhile, the central bank has scaled back regulations concerning capital requirements following lobbying from UK Finance, the banking industry body, which argued that up to £54bn of additional capital had accumulated within the sector because of holding requirements.
Following theFPC’s most recent report, UK lenders’ capital requirements will be reduced to 13 per cent from the previous 14 per cent.
This means 13 per cent of a bank’s risk-weighted assets must comprise funds capable of absorbing unexpected losses without endangering customers or the financial system.
The move is anticipated to signify a significant shift in the Treasury’s deregulation mission, with experts predicting that these changes will have a more substantial impact than Rachel Reeves’ Leeds Reforms package announced earlier this year, freeing up billions for lenders to inject into the economy.
Haji 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 financial buffer, known as Common Equity Tier 1 (CET1), is intended to safeguard a lender against shocks or economic instability and comprises bank funds that do not require repayment. Leading banking executives had advocated for such changes during meetings with lawmakers earlier this year.
“I think more in terms of looking at how we measure capital… I think that will put a competitive strain on UK banks in particular when you look at what’s happening in the United States,” said Michael Roberts, chief executive of HSBC Bank, during a House of Lords session.
