The Bank of England is moving forward with plans to ease capital requirements for major UK lenders, even as its own policymakers voice concerns about financial stability risks posed by rapid advancements in artificial intelligence and debt-fuelled stock market investments.
Planned Changes to Capital Buffers
On Tuesday, the central bank announced it intends to remove and loosen certain rules introduced after the 2008 financial crisis. These rules determine the size of the financial cushion that lenders must maintain to absorb losses and protect consumers and taxpayers during downturns.
The Bank's Financial Policy Committee (FPC) said the proposals include scrapping a longstanding buffer within the so-called leverage ratio. This change would primarily benefit the largest UK domestic-focused banks and building societies, such as NatWest, Lloyds, Nationwide, and Santander UK.
Impact on Lenders and Economy
Current proposals, which will be subject to consultation, could reduce those lenders' leverage ratio by an average of 20 basis points. This would give them a competitive edge against international peers and potentially spur additional lending to support the wider UK economy.
However, some FPC members have raised concerns that trimming these buffers could amplify existing risks to the financial system. A fresh wave of lending might increase loans to investors, including hedge funds, who have already used significant debt to purchase company shares on the stock market.
Debt-Fuelled Investments and AI Risks
Much of the debt-fuelled investment has been concentrated in AI-related stocks, whose valuations have soared in recent months. According to a report by the committee, "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 FPC is now undertaking a review to "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." This review is expected to be completed by the end of September and will influence the package of capital changes put forward for consultation in early 2027.
AI and Cyber Resilience Concerns
Separately, the FPC expressed concerns about developments in AI, which have progressed more rapidly than many experts anticipated. While frontier AI systems can boost productivity, they also significantly increase cyber risks, enabling malicious actors to inflict shocks and outages at lower costs and on a larger scale.
This could affect banks and systemically important financial firms, putting the entire system at risk. The bank stated, "Recent rapid advances in frontier AI capabilities have increased financial stability risks related to cyber and operational resilience."
The warning comes amid months of speculation about the impact of AI models such as Anthropic's Mythos, which has only been deployed to a select group of vetted companies worldwide.
