A Directional Reset: Interpreting the FPC’s New Capital Benchmark

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The publication of the December Financial Stability Report and the 2024/25 annual cyclical stress test results saw the FPC’s first review of system-wide capital requirements since 2019. The appropriate benchmark for the system-wide level of Tier 1 capital requirements is now around 13% of RWAs (equivalent to ~11% CET1), a 100bp lower capital benchmark alongside unchanged CCyB.

It is worth underlining that this is a system-wide benchmark used to guide expectations, rather than a single “switch” that instantly resets each bank’s requirements. A legal note captured in the press pack stresses the benchmark “is not immediately a binding rule”, but it strongly shapes PRA Pillar 2 decisions, buffer calibration, and market expectations.

The reaction from commentators was lukewarm. Brokers RBC framed the December package as constructive but “not an instant game changer”, noting the BoE expects capital requirements to come down by ~1% in 2027 (with ~0.5% from P2A) and estimating that this 0.5% P2A reduction frees ~£8.5bn of capital for RBC’s covered banks. Autonomous similarly highlighted that the headline shift was as expected, but that it contained “fewer concrete policy updates” than hoped - notably no CCyB cut, and “an announcement of a review” on leverage rather than immediate changes. Broadly speaking, brokers felt that the move was directionally positive but there was uncertainly about how quickly it becomes actionable for banks’ management targets and distributions.

A useful practical implication (and a good “investor narrative” point for an expanded piece): RBC explicitly suggested banks should shift investor messaging away from absolute CET1 ratios and toward capital levels relative to regulatory targets, especially if management targets start to come down over the next 12 months.

Why now?

The stress test results provided the immediate “permission structure” for the change in tone. Morgan Stanley highlighted an aggregate 350bp drawdown, with all banks ending above hurdle rates; it also attributed the lower drawdown (vs earlier tests) to balance sheet de-risking and a higher profitability starting point. Press coverage also emphasised that, even at the low point, the system remained meaningfully above minima/ systemic buffers (cited at around £60bn above aggregate minima and systemic buffers).

A particularly helpful articulation of the FPC’s logic came from Sarah Breeden (Deputy Governor for Financial Stability) in the Financial Times. She positioned the benchmark as an attempt to find the level of capital that maximises growth through the cycle (balancing fewer crises vs potentially higher lending costs). She also explained a key technical nuance: the FPC judged “appropriate” capital at ~11%, but then added 2 percentage points to account for imperfections/gaps in RWA measurement, yielding the 13% benchmark.

Buffer usability

The FPC and PRA’s stated ambition is to make buffers usable in stress, and to reduce incentives to deleverage in downturns or run with large voluntary buffers. However, multiple commentators highlight that behavioural stigma around dipping into buffers (and the market/supervisory reaction) is the real barrier. Convincing banks and shareholders that buffers can genuinely be drawn down could be challenging after ~15 years of tightening; prudence has “paid off” and perceptions may take time to shift.

Potential impact (if this workstream succeeds): even without changing headline minimum much further, improving usability could be the difference between (i) a 13% benchmark that remains largely theoretical, and (ii) banks actually reducing management targets and deploying capital into lending, organic growth, or distributions.

Simplification: the “Bufferati” vision and a single releasable buffer

Autonomous flagged that the BoE referenced Sam Woods’ 2022 “Bufferati” speech and the idea of a single releasable buffer, but also cautioned that banks are still likely to want to run headroom to MDA in practice. Separately, GlobalCapital quoted ABN AMRO’s Kapil Damani describing this as the UK’s first genuine rethink of the framework in over a decade i.e., a shift from “more capital” to “smarter, better-calibrated capital”, and explicitly linked the benchmark change to a move toward simpler, more usable buffers.

Potential impact: simplification is not just aesthetics; it could reduce real or perceived “stack complexity” that drives internal management buffers, and (depending on design) could also make stress-time capital deployment less procyclical.

Leverage ratio buffers: likely the most “material” lever for domestic banks

Several sources point to leverage as the area where changes could be more significant than the 13% benchmark itself. If leverage constraints are not addressed it will be difficult for banks like Lloyds and Natwest to lower target capital levels, since for domestics as well as UK-based global investment banks CCyB and domestic surcharge buffers are added onto the leverage requirement and must be met with pure CET1 (whereas the base 3.25% can be partly met with AT1).

Autonomous added that if objective is to make leverage less binding under stress, it may require revisiting the systemic buffer calibration in the leverage stack (they reference it as currently 35% of the RWA-based metric), though that could imply further divergence from international standards.

Potential impact: if leverage buffers are recalibrated, the beneficiaries could disproportionately be domestic retail banks whose leverage stack is currently “heavier”, potentially enabling lower CET1 targets even if RWAs fall and IRB improvements reduce risk densities.

Domestic-exposure capital requirements: de-duplicating overlapping intents

The BoE will do further work on how domestic-exposure-related requirements interact (CCyB, O‑SII, elements of P2A). Presumably the intent is to avoid double-counting of risk.

Potential impact: this is a technically complex area, but it is potentially where the BoE/PRA can reduce conservatism without weakening overall resilience — by ensuring different tools are not inadvertently charging for the same exposure twice.

Broad implications

A Financial Times commentary cited Alvarez & Marsal estimates that, on £3tn of domestic RWAs, a 1pp change could free up ~£30bn of capital; it also highlighted that how much is realised depends on banks’ own capital headroom preferences. Compare with RBC’s “covered universe” specific estimate (mentioned above) of ~£8.5bn from the 0.5% P2A move.

A Reuters piece captured the post‑announcement debate sharply: former officials John Vickers and David Aikman argued requirements should be higher, warning the practical effect could be higher payouts to shareholders; Governor Bailey defended the cut, saying roughly half the change reflects Basel 3.1 and half reflects lower-than-expected systemic importance, and emphasised that financial stability is a precondition for growth (also pointing to the credibility of the UK resolution regime).

Ultimately, even if the framework is easing, political and reputational constraints will shape how quickly banks convert capital capacity into distributions.

A GlobalCapital piece discusses the impact on the UK SRT market (relevant for the Treasury Platform): while the “natural expectation” is that lower requirements reduce the imperative for SRT, market participants still expect activity to continue because (i) the reduction is small and (ii) banks typically maintain safety margins anyway.
The same source notes an uptick in private capital relief transactions and highlights that incoming Basel 3.1 (tightening capital calculation) remains a key driver of banks’ incentive to optimise capital.

The Financial Times commentary explicitly argued Bailey’s pronouncements will be watched across Europe, noting competitive dynamics with the US and potential pressure on European regulators if the UK moves further. A separate GlobalCapital piece discusses EU buffer usability/simplification debates and notes expectations around an ECB-led simplification task force report, situating the UK move in a broader global “lighten the load” conversation (with uncertainty about how far it goes). So a key consideration to note in any more in-depth piece whether the UK is ‘front‑running’ a broader recalibration - or diverging?

Pulling this together, the FPC’s 13% benchmark is best read as a directional reset and a platform for follow‑through work - rather than a one-off “capital giveaway.” The stress test results support the claim that resilience is strong, and Breeden’s articulation of “optimal capital” plus an explicit RWA‑uncertainty overlay provides a defensible prudential rationale.

But the real-world impact for banks will depend on: (i) whether buffer usability reforms genuinely change behaviour, (ii) whether the leverage review reduces bindingness for domestic banks, and (iii) whether “domestic exposure” requirements can be streamlined without creating new blind spots.