The Bank of England’s Financial Policy Committee has just confirmed that the UK banking system is resilient. Banks can weather extreme stress. That is good news. Except here is the awkward bit: the very capital rules that prove resilience are now starving the mortgage market of funds.
On the same day the FPC published its reassurance about banking stability, UK Finance delivered a stark message to the Bank of England. The organisation representing the banking industry argues that overlapping capital requirements are locking up around £250 billion of potential lending capacity. For households trying to access mortgages in a market where rates are rising and products are vanishing, that locked-up capacity matters enormously.
The Paradox at the Heart of Banking Regulation
Here is what happened after the financial crisis. Regulators learned an expensive lesson and built capital requirements that turn out to work. UK banks are genuinely more resilient. They can absorb shocks that would have triggered collapses in 2008. No one disagrees with that outcome.
But resilience comes with a cost. The safer the system is required to be, the less balance sheet capacity banks have to lend. At some point, you reach a threshold where the constraint becomes real. You are no longer choosing between safety and growth as a theoretical trade-off. The capital you are forcing banks to hold is actually preventing them from lending to households and businesses. That threshold, according to UK Finance, is where we are now.
Banks are the plumbing of UK lending. They provide roughly 85 per cent of household lending and almost half of corporate lending. When you constrain their balance sheets, you constrain the mortgage market. Right now, that constraint is becoming visible.
The Complexity of Overlapping Rules
Capital requirements in isolation are not the issue. The issue is that ringfenced banks face multiple, overlapping charges that all target the same underlying risk. A single bank might be subject to the Systemic Risk Buffer, the Countercyclical Capital Buffer, the Other Systemically Important Institution buffer, and the PRA’s geographic concentration risk requirement. Each one targets the same underlying risk from a different angle. The result is that banks end up holding far more capital than any single requirement would dictate.
The FPC has actually tried to signal a loosening. It lowered the industry-wide benchmark for Core Equity Tier One capital from 14 per cent to 13 per cent. Sounds like progress. Except it does not matter in practice, because the binding constraint is not the FPC’s benchmark. It is the PRA’s individual regulatory requirements for each bank. Those individual requirements can and do exceed the benchmark. Signalling is not the same as actually releasing capacity.
Add to that the leverage ratio, which acts as a backstop requirement but has become tighter than the standard capital requirements themselves. The UK’s implementation goes well beyond what the Basel standards require. Rather than sitting behind the main capital framework as a safety net, it has become the binding constraint. Banks cannot lend more without busting the leverage ratio, regardless of what their risk-weighted capital looks like.
The Mortgage Market Context
None of this is abstract. The mortgage market has been under strain for months. The Iran conflict has pushed gilt yields up and mortgage rates up with them. Lenders are withdrawing products. First-time buyer rates have climbed. The Office for National Statistics reckons about 1.3 million more households are facing higher borrowing costs. In this environment, every bit of available lending capacity matters.
The FPC has noted that recent market moves, whilst significant, have not reached the severity of its 2025 stress test scenario. Banks passed that test. They are strong enough to handle worse. That resilience is real and worth having. But the statement raises a question: if banks are genuinely resilient enough to handle extreme scenarios, why are we preventing them from lending more in normal times?
The £250 billion figure is striking. That is not money that needs to be conjured up or that involves taking silly risks. That is lending capacity that exists right now, locked away by rules that work like layers of insurance on top of insurance. It could go to households saving for a first home. It could support buy-to-let investors. It could help businesses access the credit they need to grow. Instead, it sits idle.
What Actually Needs to Change
UK Finance is not asking for a demolition of capital frameworks. The industry is not calling for a race to the bottom or a return to pre-crisis laxness. What it is asking for is targeted reform. Address the buffer overlaps so banks are not holding five different cushions against the same risk. Recalibrate the leverage ratio so it sits behind the risk-weighted framework rather than in front of it. Pay attention to what other major economies are doing. The EU is simplifying its regime. The US has announced reductions in CET1 buffers, ranging from 4.8 per cent for the largest banks to 7.8 per cent for smaller ones. The UK appears to be moving in the opposite direction, tightening a system that is already among the strictest globally.
The Real Question
The tension here is genuine. The FPC says banks are resilient and do not need to release capital. UK Finance says the capital rules are constraining growth. Both things could be true. Banks might be resilient and the rules might still be too tight for the market to function well. Resilience is not the same as optimal growth. A financial system can be very safe and still be too restrictive for the economy it serves.
The mortgage brokers and lenders you work with are watching this closely. They want to lend. They have customers who want to borrow. But the plumbing of the system is clogged by overlapping requirements that may have made sense when they were introduced, but which now feel like unnecessary friction. Whether the Bank of England sees it that way is something the industry will find out soon.
Source: David Postings, CEO of UK Finance, “UK bank capital rules are becoming a drag on growth”, Financial Times, 2 April 2026.
