UK banks hold bigger voluntary capital buffers than the Bank of England expects
Bank of England regulator David Bailey says UK banks hold management buffers larger than the Bank would expect. He told City AM the Bank has opened talks with international peers on simplifying the capital stack to free capital for the economy.
The Board Room · Leadership desk
Bailey says UK banks hold significant management buffers above requirements. AFME called the leverage ratio gold-plating, a description he does not recognise. The Financial Policy Committee sets requirements; Conservatives would need to legislate. He says it could support households.
- decision UK banks Choose to hold "quite significant management buffers" over and above regulatory requirements, Bailey says, claim 6
- contradiction AFME Report warned the UK leverage ratio was a "clear instance of gold-plating", claim 16
- contradiction David Bailey, Bank of England Says he does not "recognise that description of our regime", claim 19
- capability Financial Policy Committee The decision to set lenders' capital requirements rests with it, claim 12
- constraint Conservatives Would have to legislate to pave the way for adjustments to capital requirements, claim 12
- exposure Customers and households Bailey says the capital banks hold could be deployed supporting them, claim 9
| Who | How | Kind | Claim |
|---|---|---|---|
| UK banks | Choose to hold "quite significant management buffers" over and above regulatory requirements, Bailey says | decision | 6 |
| AFME | Report warned the UK leverage ratio was a "clear instance of gold-plating" | contradiction | 16 |
| David Bailey, Bank of England | Says he does not "recognise that description of our regime" | contradiction | 19 |
| Financial Policy Committee | The decision to set lenders' capital requirements rests with it | capability | 12 |
| Conservatives | Would have to legislate to pave the way for adjustments to capital requirements | constraint | 12 |
| Customers and households | Bailey says the capital banks hold could be deployed supporting them | exposure | 9 |
What happened
- In July the Bank's Financial Policy Committee outlined a shake-up of the buffer system centred on a single buffer that is releasable in stress.
- A report earlier this year from AFME, which represents over 150 global banks, called the UK leverage ratio a clear instance of gold-plating.
- Conservative leader Kemi Badenoch has pledged to bring capital requirements back in line with competitors if her party is elected.
- Bailey, once tipped to lead the PRA, is set to leave at the end of October, and Katharine Braddick was named Sam Woods' successor in February.
Why it matters
- contradiction AFME blames a specific rule for forcing banks to hold more, while Bailey points to firms' own buffer choices and says the regime matches the EU, so each side names a different fix.
- decision Bank treasurers must decide whether to run management buffers down while the single-buffer design is still under discussion with international peers.
- cost Any release trades lending capacity now against resilience later, and Bailey says both errors are costly: a crisis is expensive and scars, and an oversized cushion strains viable activity.
The excess in question is voluntary. Firms must already hold a multi-layered stack of strict legal minimums, specific buffers for major domestic firms and overall leverage caps [3]. On top of that they add discretionary cash, called management buffers, to avoid accidental breaches [4]. Banks were choosing to "hold quite significant management buffers over and above our regulatory requirements," Bailey said [6]. He argued the money could be used elsewhere: "That capital they're holding could be deployed for supporting their customers and households," he said [9].
The Prudential Regulation Authority's answer is certainty. Bailey said the PRA was looking to give firms "certainty" over their requirements so that more capital could go into the economy [8]. In our view the logic is that a firm confident it can draw on a releasable buffer in stress needs less private cushion against an accidental breach. That is our inference from the design. City AM described the aim as freeing up "billions" of stored cash, and its report does not say how much of the excess the change would release [20].
Bailey's own list of causes sets a limit on what a rule change can reach. Capital levels, he said, reflect a "rainy day fund, an opportunities fund" and rating agency requirements [7]. A single regulatory buffer speaks to the regulatory part of that list. In our view the opportunities fund and the rating agency requirements stay outside what a buffer redesign decides.
The banks' trade body locates the problem in the rules. The leverage ratio AFME objects to requires at least three quarters of a bank's tier one capital to be CET1 [17]. AFME said it "penalises good risk management and creates incentives to invest in higher risk assets" [18]. Bailey said he did not "recognise that description of our regime" [19]. He said the Bank's comparisons with other jurisdictions put the UK regime on a par with the EU for overall capital levels and below the US [14].
The political route runs through the FPC. Because the committee sets lenders' capital requirements, the Conservatives would have to legislate to change them [12]. Asked about Badenoch's pledge, Bailey said: "We work with whatever parliamentary mandate we're given, and of course would work with whatever government we have at any particular time" [13].
In our view the buffers firms hold today will stay where they are until a rule changes. The talks with international peers have only started [1].
What to watch
- Whether the FPC or PRA publishes a timetable or consultation for the single releasable buffer once talks with international peers progress.
- What Katharine Braddick says about management buffers and regulatory certainty after Bailey leaves at the end of October.
- Whether the Conservatives set out how they would legislate on capital requirements, given that the FPC sets them.
Clarity's read
What the record supports and how the coverage leans. The claims behind it follow.
Reality
- Evidence40
- Adoption
- Insufficient
- Hype gap+15
- Incentives55
- Confidence55
Claim ledger
Ranked by verification strength, evidence, and original report placement.
- [1]
David Bailey, executive director of Prudential Policy at the Bank of England, told City AM the Bank had started talks with international peers over how to simplify banks' capital stack.
- [2]
In July the Bank of England's Financial Policy Committee outlined a shake-up of the capital buffer system centred on a "single buffer that is releasable in stress".
- [3]
Firms are required to hold a multi-layered stack of separate capital cushions, including strict legal minimums, specific buffers for major domestic firms and overall leverage caps.
- [4]
Lenders voluntarily hold extra discretionary cash, called management buffers, on top of baseline requirements to avoid accidental breaches.
- [5]
"The size of the buffer we see is larger than we'd expect," Bailey said.
- [6]
Bailey said banks were choosing to "hold quite significant management buffers over and above our regulatory requirements".
- [7]
Bailey said a number of factors influence capital levels, including a "rainy day fund, an opportunities fund" and rating agency requirements.
- [8]
Bailey said the Prudential Regulation Authority was looking to give firms "certainty" over their requirements, to free up more capital to be put into the economy.
- [9]
"That capital they're holding could be deployed for supporting their customers and households," Bailey said.
- [10]
Bailey said that if capital is set too low "you run the risk of a financial crisis", which is "expensive" with a "long-term scarring effect", and that capital set too high can "strain viable and productive economic activity".
- [11]
Conservative leader Kemi Badenoch has pledged that the Conservatives would bring "capital requirements back in line with our competitors" if elected, having criticised "buffer after buffer after buffer".
- [12]
The decision to set lenders' capital requirements rests with the Bank of England's Financial Policy Committee, so the Conservatives would have to legislate to pave the way for adjustments.
- [13]
Asked about Badenoch's pledge, Bailey said: "We work with whatever parliamentary mandate we're given, and of course would work with whatever government we have at any particular time."
- [14]
Bailey said the Bank's work comparing the UK with other jurisdictions indicated the UK regime is comparable with the EU in terms of the outcomes it produces for overall capital levels, and below the US.
- [15]
Bailey, who was tipped to lead the PRA after Sam Woods' tenure, is set to depart at the end of October; Barclays executive Katharine Braddick was named Woods' successor in February.
- [16]
A report earlier this year from the Association of Financial Markets in Europe (AFME), which represents over 150 global banks including the UK's big four, warned that the UK's leverage ratio was a "clear instance of gold-plating".
- [17]
The leverage ratio rule dictates that at least three quarters of a bank's tier one capital must be made up of the highest-quality regulatory capital, known as CET1.
- [18]
AFME said the ratio "penalises good risk management and creates incentives to invest in higher risk assets".
- [19]
Bailey said he did not "recognise that description of our regime".
- [20]
City AM described the talks as aiming to free up billions of stored cash; its report does not state the total size of the management buffers or how much the change would release.
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Sources
1 independent publisher whose own reporting we read for this story.
- cityam.comUK banks could unleash cash buffers to spur economy, says top Bank of England regulator
1 article · October 14, 2026
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