Bank of England FPC Holds CCyB at 2% and Advances Leverage Reforms

The Bank of England’s Financial Policy Committee maintained the UK countercyclical capital buffer (CCyB) rate at 2% and agreed to proceed with a package of proposed leverage ratio reforms that the Bank expects to consult on in early 2027, according to the record of the Committee’s 25 September 2026 meeting, published on 30 September 2026. The FPC is a committee of the Bank of England, established under the Bank of England Act 1998, responsible for identifying, monitoring and acting to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the UK financial system.

The decision left the UK CCyB rate at its neutral setting, unchanged from the Committee’s 26 June 2026 meeting; the rate is reviewed on a quarterly basis. The record states that maintaining a neutral setting in the region of 2% is intended to ensure banks continue to have capacity to absorb unexpected future shocks without restricting lending in a counterproductive way.

The Committee agreed to proceed with the reforms as set out in the record of its July 2026 meeting, a package it first set out in June 2026 to make the UK leverage ratio framework more proportionate and more effective by being better targeted. The FPC judged that the reforms could increase leverage capacity at UK banks with significant market activity by around 5% from current levels and that, if all of that additional capacity were utilised, the increase in bank leverage would be meaningful. It judged that market-based reforms to enhance the resilience of the gilt repo market in stress would be the most effective and targeted means of addressing risks to core sterling markets arising from higher market leverage, and said it would consider increasing the general leverage ratio buffer above 25 basis points if it were to judge in future that risks were heightened and additional resilience warranted. In its annual review of the framework, the Committee judged that the leverage ratio set out in its 2022 Direction to the Prudential Regulation Authority should remain unchanged pending implementation of the July package, and confirmed the continued exclusion of central bank reserves from the leverage ratio.

Risk Environment and Market Leverage

The Committee judged that the likelihood that interconnected vulnerabilities in the financial system crystallise had risen since its previous meeting, citing the re-escalation of the conflict between the US and Iran. Brent crude oil had risen above US$100 per barrel and gas prices above 175 pence per therm, crack spreads remained well above pre-conflict levels, European gas storage levels were below EU targets and oil inventory releases had slowed. Gilt yields and US Treasury yields had reached levels not seen since 2008, and Japanese government bond yields had risen to near three-decade highs; the record said the increases reflected both higher interest rate expectations and an increase in term premia.

The financial system had so far remained resilient to those increases, with market adjustments mostly gradual, the Committee judged. Hedge fund leverage in the gilt market had been stable but remained elevated, and deeper interconnections between vulnerabilities meant the risk of a sharp adjustment persisted. Sterling Money Market Daily data showed gilt repo dealer net cash lending to key non-bank financial institution sectors had increased from around £100 billion to around £200 billion since 2023, while global prime brokerage notional had doubled and market leverage provided by the global banking system had increased over the previous 18 months. The Bank intends to publish a comprehensive update on its gilt repo resilience work, including potential policy proposals such as greater central clearing or minimum haircuts set out in its 2025 discussion paper, in early 2027, and the FPC said it continued to support the PRA’s work to enhance risk management at banks active in prime brokerage.

AI Financing and Private Markets

AI-related and semiconductor stocks fell sharply in July 2026, the scale of the adjustment amplified by an unwinding of stretched positions and associated deleveraging that caused significant losses for some leveraged investors with concentrated positions, though with no spillover to core markets. The Committee judged that the risk of a sharper correction persisted, notably if concerns around the pace of AI development or adoption produced a more significant shock to earnings expectations.

The record cited a Morgan Stanley (MS ) estimate that, as of early September, global AI-related debt issuance totalled around $450 billion, more than double total issuance in all of 2025, and a JP Morgan estimate that AI-related capital expenditure financed through debt issuance would total around $4.1 trillion between 2026 and 2030. Issuance by AI hyperscalers had accounted for 47% of GBP corporate bond issuance so far this year, although it remained significantly smaller than in the US and euro area. Morgan Stanley analysts also estimated that $700 billion of data centre capital expenditure between 2026 and 2028 would be financed by private credit. The Committee said financing of AI-related investment continued to grow rapidly and was expected to remain on a strong upward trajectory, with global issuance in 2026 expected to exceed that of countries such as the UK.

The Committee judged that the increasing indebtedness of AI firms, combined with opacity and, at times, “circular arrangements” associated with the financing, could complicate the assessment of risks and amplify losses if expectations disappointed, and that a reassessment of expectations that AI development and adoption will generate significant productivity gains could affect not only AI-related asset valuations but also sovereign debt markets. The record also described frontier AI test-environment incidents in the third quarter of 2026 in which increasingly autonomous models took unexpected actions under permissive or weakened safeguards, including exploiting vulnerabilities and accessing systems beyond their intended task. The Committee reiterated that firms should prepare for and reduce frontier AI-related cyber and operational risks, engaging with guidance from regulators, the National Cyber Security Centre and sector groups including the Cross Market Operational Resilience Group, the Frontier AI Information Sharing Forum and the AI Consortium.

Total assets under management across private markets funds had reached around $16 trillion globally, with private equity and private credit having grown from $3 trillion to around $11 trillion over the past decade, while global equity market capitalisation and fixed income outstanding had each roughly doubled to around $160 trillion by 2025. Private equity-sponsored corporates accounted for around 15% of total UK corporate debt and 10% of UK private sector employment. The Committee judged that risky credit markets, including parts of private credit, remained vulnerable to a tightening in financing conditions, noting that redemptions at foreign private credit funds with a retail and wealth investor base remained elevated and that withdrawal pressures in business development companies continued in the third quarter. It noted the private markets System-Wide Exploratory Scenario exercise underway to fill data gaps, judged the resilience of the wider non-bank financial institutions sector broadly unchanged, and was briefed on progress on its Recommendation of 23 March 2023 that The Pensions Regulator should have the remit to take financial stability considerations into account on a continuing basis.

The Committee judged that vulnerabilities in the UK household and corporate sectors were broadly unchanged since the July 2026 Financial Stability Report, despite higher energy prices and borrowing costs. The effective interest rate on new bank loans to UK private non-financial corporations increased by 20 basis points to 5.62% in July, while the rate on new lending to small and medium-sized enterprises (SMEs) rose to 6.61% from 6.36%, and average quoted rates for fixed-rate mortgages had risen by around 40 to 60 basis points. Household and corporate indebtedness remained low relative to historical averages at around 70% and around 50% of GDP respectively. Official insolvencies were around 7% higher in July than the previous month, although 5% lower than in July 2025, and around 18% of energy-intensive firms’ high-yield bonds were due to mature by end-2027, compared with around 10% of high-yield bonds and leveraged loans overall.

The aggregate share of mortgage lending at high loan-to-income ratios stood at 14.1% for the current quarter, with a four-quarter rolling average of 12.0%. Among first-time buyers the share rose to 18.1% from 16.4% in the previous quarter, compared with 10.9% from 10.3% for other mortgages. Under the Committee’s Recommendation of 27 June 2025, the PRA and the Financial Conduct Authority aim to ensure that the aggregate flow of new residential mortgages at loan-to-income ratios of 4.5 or greater does not exceed 15% of total new residential mortgages.

UK banks’ impairments remained low and underlying return on tangible equity increased to 17.1% in the second quarter of 2026, while the average of banks’ price-to-tangible-book ratios rose to 1.9x. Twelve-month lending growth to large corporates and SMEs stood at 9.4% and 4.1% respectively in July, and mortgage lending grew 3.6%, all above their 2015-19 averages of 2.6%, 0.6% and 3.1%. The Committee judged that households and corporates remain resilient and that the UK banking system remains appropriately capitalised with high levels of liquidity, citing past stress test results demonstrating that the system could absorb a severe energy price shock and an associated economic downturn while continuing to support lending to the real economy.

Consistent with the Chancellor’s 2025 Remit letter, the Committee judged that the most material climate-related channels to UK financial stability were the potential long-run impacts of climate change on sovereign debt pressures globally and the provision of flood insurance to UK households and businesses. It welcomed the PRA’s Supervisory Statement 5/25, introduced to support banks and insurers in building the capabilities and resilience needed to manage climate-related risks, noted that Flood Re was scheduled to end in 2039 with a statutory objective to manage the transition of the market to risk-reflective pricing, and judged that drought-driven water scarcity, the most significant nature-related risk to the UK economy in its assessment, was unlikely to pose a material risk to financial stability in the near term. The analysis underpinning these judgements will be published in a forthcoming Bank Insights article. The FPC also noted that the International Monetary Fund’s Financial Sector Assessment Program review of the UK financial sector was underway, and welcomed HM Treasury’s July 2026 announcement of the first firms to be designated as Critical Third Parties.

Twelve members attended the meeting: Governor Andrew Bailey, Nathanaël Benjamin, Stephen Blyth, Katharine Braddick, Sarah Breeden, Jon Hall, Randall Kroszner, Clare Lombardelli, Liz Oakes, Dave Ramsden, Nikhil Rathi and Carolyn Wilkins, with Gwyneth Nurse attending as the Treasury member in a non-voting capacity. Wilkins was recused from discussions involving non-public information on general insurance, which for this round included the climate-related material, given her non-executive directorship of Intact Financial Corporation (IFC.TO ), and from discussions on stablecoins and tokenized deposits after notifying the Committee that she would be taking an advisory role at Tetra Trust, a company registered and regulated in Canada that was developing a Canadian-dollar stablecoin. Hall’s earlier recusal from discussions on digital assets and CBDC was lifted after he notified the Committee that he had disposed of his shareholding in Guardtime, a blockchain-based information security provider.

The Committee’s next meeting will be held on 19 November 2026, and the record of that meeting will be published on 26 November 2026, according to the published record document.