22OCT

Banks passed, so the buffer was cut

3 min read

16:23UTC

The Bank of England modelled a severe recession through the banks' books, judged the system resilient, and then lowered the capital it requires them to hold by 100 basis points to 13%.

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Key takeaway

The rulebook written after 2008 caught banks, and banks are now the one thing in Britain working.

The Bank of England put the banking system through a severe hypothetical shock in its 2025 stress test, judged it resilient, and cut the assessed capital requirement by 100 basis points (one percentage point) to 13% in December 2025⁠¹. The scenario was not a mild one: two simultaneous deep recessions with large falls in asset prices. Barclays came through it at a minimum 8.8% before management actions and 9.3% after, against a 7.2% requirement⁠². Those percentages are CET1 ratios, common equity tier one, the highest-quality loss-absorbing capital a bank holds measured against the risk on its books.

A regulator lowering its demands after a test is a stronger signal than a bank passing one. Passing can be arranged; requiring less capital is the Bank of England putting its own judgement on the line about how much cushion the system needs. Nothing else in this register has a supervisor moving in that direction.

Two honest caveats belong here rather than in a footnote. A stress test models a hypothetical recession, it does not observe a real one, and official reassurance about bank balance sheets had a poor record in 2007. What the December 2025 result tells us is that the banks survived a modelled recession, and nothing more than that. The second caveat is structural: the post-2008 reform programme, capital floors, annual stress testing, statutory resolution powers, was built to stop one specific failure mode, a leveraged private lender with funding that can run. None of the distressed ledgers in this register has runnable funding, which is why none of them can produce a 2008-style overnight event. It is also why none of them has an automatic stabiliser when things go wrong.

Deep Analysis

In plain English

A bank's capital is the buffer of its own money, not customer deposits, that absorbs losses before the bank itself becomes insolvent. Common equity tier one (CET1) is the highest-quality form of that buffer. Every year or two, the Bank of England runs a stress test: a hypothetical severe recession is modelled through each bank's books to see whether its capital would survive. In 2025, banks came through comfortably, and the regulator responded by lowering how much capital it requires them to hold, from 14% to 13%, because the test suggested less was needed to stay safe in a genuinely bad scenario.

What could happen next?

Meaning
The capital requirement cut is a genuine counter-indicator to the topic's central question, though a stress test can only ever model a hypothetical scenario, not observe an actual recession.

Source Landscape

This story draws on neutral-leaning sources

Primary parallel: The Basel III capital reforms, agreed internationally after 2008 specifically to force banks to hold more loss-absorbing capital against leveraged, runnable funding, are the direct reason today's stress test could be passed comfortably; this is the one part of the post-2008 regulatory architecture built to prevent a repeat of exactly the failure mode it targeted.

Counter-parallel: Regulators judged UK and US bank capital broadly adequate in the years immediately before 2007, using the standards of the time, only for the crisis to reveal that off-balance-sheet exposures and short-term wholesale funding had not been properly captured. A passed stress test is not, by itself, proof the next failure mode has also been anticipated.

The cut applies system-wide, but individual banks retain their own buffers above the reduced minimum. Barclays' post-management-action stressed CET1 ratio of 9.3% sits well above both the new 11% implied system minimum and its own 7.2% specific requirement.

That gap shows capital strength varies materially bank by bank, even within a system judged resilient overall.

Consensus view: The Bank of England's Financial Policy Committee treats the 100 basis point cut as evidence the post-2008 Basel III capital regime achieved its purpose: banks now hold enough loss-absorbing capital that the stress-tested minimum can be relaxed slightly without reintroducing systemic fragility.

Counter-view: Some financial-stability economists, including voices associated with the Bank for International Settlements, caution against reading any single stress test as proof of durable resilience, since a stress test models one hypothetical scenario rather than observing a live shock, and capital requirement cuts made during calm periods have preceded painful surprises before, most notably in the years leading up to 2008 itself.

Key tension: Whether a passed stress test justifying a lower capital requirement reflects genuine, structurally embedded resilience, or is simply evidence the specific scenario modelled was not severe enough to reveal the next crisis's actual mechanism.

Sources:Bank of England

Mentions:Bank of England →Barclays →Financial Policy Committee →England →Bank for International Settlements →

First Reported In

Update #1 · The distress moved from banks to councils

Bank of England· 27 Jul 2026

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Causes and effects

This Event

Banks passed, so the buffer was cut

The institutions at the centre of 2008 are the one part of this register where a regulator has actively reduced its demands.

Led to

MPC holds 3.75% and maps 2034 gilt exit

Last December's cut to banks' capital requirement preceded the FPC's September finding of resilient banks.

Occurred 16 Sept 2026

Read story →

Different Perspectives

Pension Protection Fund

Acting chief actuary Aaron Pang put the rise to 135.0% funded down to liabilities falling 2.1% against a 1.0% fall in assets, reflecting higher gilt yields. On Lowdown's reading, the yields that lift the Treasury's interest bill leave 4,838 company schemes with a £280.7bn surplus that does not reduce state borrowing.

Torsten Bell

The Labour figure wrote on 14 October that the IMF's October figures show the fastest fiscal consolidation in the G7. The IMF forecasts the UK deficit falling from 3.8% of GDP in 2026 to 1.4% in 2031, a squeeze still to be delivered through taxes and spending.

Tax Justice UK

The left-leaning campaign group says ten tax reforms would raise over £60bn a year for public services, and on 22 October asked why higher taxes on extreme wealth remain politically difficult. It offers the tax-led exit to the IEA's cuts; the £60bn is its own claim, not an official costing.

Institute of Economic Affairs

The free-market think tank's Alternative Budget of 19 October would suspend the state pension triple lock for three years, freeze welfare in cash terms and move tax onto a wider VAT. It claims the day-to-day budget returns to surplus in 2027-28, its own projection rather than an official costing.

Resolution Foundation

The living-standards think tank said welfare spending ran about £2.5bn above expectations in September, City AM reported on 21 October, and its economist Greg Thwaites urged targeted energy support. Its figure lands as a Chancellor who calls welfare cuts a moral duty finalises the 28 October Budget.

Institute for Fiscal Studies

Director Helen Miller said a steady-as-she-goes Budget is not an option, with the IFS putting 2029-30 headroom at about £20bn, The Independent reported on 12 October. The IFS puts the cost of avoiding cuts and funding higher defence at around £35bn of tax rises or benefit cuts, more than any headroom estimate in circulation.

Written with AI from Lowdown's published reporting. Not individually reviewed by an editor. Editorial standards.