Building A Banking Regime For The Future - Speech By David Bailey, Bank Of England Executive Director, Prudential Policy, Given At JPM UK Banks ALM Conference

Speech

Introduction

Good morning. I would like to thank JP Morgan for the invitation to speak today.

Today, I’d like to set out the Prudential Regulation Authority (PRA)’s current pipeline of reforms related to the capital and liquidity of banks and building societies (hereafter ‘banks’). As we set out in our Business Plan for 2026/27 published earlier this month, a key aim of our work programme is to make sure that the framework is positioned for the future – supporting resilience, enabling growth, and allowing industry to innovate responsibly.

One important theme is that our work builds on the extensive changes we have already delivered in recent years. We are not tweaking at the margins. Having built resilience in the system, through over a decade of post‑crisis reform work, we are now updating, refining, and in some areas fundamentally reshaping parts of the prudential framework to ensure it remains effective, proportionate, internationally credible, supports innovation in the industry whilst also addressing the lessons we have learned from events over recent years.

So, my aim this morning is to bring that together for you. I will begin with a brief recap of our approach to capital and liquidity regulation and how this relates to the PRA’s primary and secondary objectives. I will then take you through each of the major strands of our policy agenda. And I want to conclude by highlighting the unifying thread that runs across all this work: a commitment to maintaining an appropriate level of resilience in the system while designing a regime that is more proportionate, efficient, coherent, and well calibrated for the way the banking system is evolving.

Background 

Our approach to capital and liquidity regulation 

Let me start with some key principles which underpin our work.

We require banks to hold capital for three reasons: first, to absorb unexpected losses; second, to ensure they can continue to support their customers through economic downturns; and finally, to enable an orderly failure if a bank does fail, protecting the taxpayer from bearing the costs and limiting wider economic damage. Alongside this, we require banks to hold liquidity so they can meet their obligations to repay depositors and other creditors during periods of stress without resorting to fire sales or disruptive deleveraging. These requirements exist because banking systems tend to be highly leveraged, for example the UK system today is twenty times leveraged, and banks are inherently vulnerable to confidence shocks and maturity mismatches. This is important, given the critical services they provide to both households and businesses – payments, settlement, lending, deposit taking – are essential to the functioning of the real economy.

These requirements directly support the PRA’s primary objective to promote the safety and soundness of firms and, ultimately, financial stability. In advancing that objective, we also focus very hard on how to do so in a way which advances our secondary objectives. These are to facilitate competition between firms and, subject to alignment with international standards, the competitiveness and growth of the UK economy in the medium‑to‑long term. And so a big focus of our work is to deliver an appropriate level of resilience whilst ensuring our requirements are efficient, proportionate, and support innovation. That reflects the connection between our primary and secondary objectives. A resilient financial system that is well placed to avoid the severe costs that financial crises inflict underpins long‑term sustainable economic growth.

The regulator’s impact on growth 

In line with that approach, the implementation of the secondary objective to facilitate competitiveness and growth, which came into effect in 2023, has pushed us to build a much deeper understanding of how our actions as a regulator can influence growth. In short, this is based on three key foundations that our regulation seeks to target:

• Maintaining trust in the UK financial system and its resilience so that firms, whether domestic or, like our hosts at this event today, international, have the confidence to invest and build their businesses; 
• Operating efficiently, so that regulatory requirements and processes are timely proportionate and cost effective for firms to engage with; and 
• Being responsive to new developments, and in doing so supporting the safe adoption of innovation across the financial services sector directly, and the provision of new and more dynamic services to the customers it supports. 

In turn, these foundations support growth and competitiveness by improving the efficient allocation of capital, attracting financial sector business to the UK, and supporting the ability of UK firms to sell their services abroad. These are all crucial factors in maintaining the UK’s role as a major global financial centre.

The end of a long road of post-crisis resilience building 

With those foundations in mind, it’s worth reflecting on how the regulatory landscape for banks has changed since the global financial crisis of 2007/08. The capital and liquidity framework has undergone a comprehensive overhaul to address the vulnerabilities in the financial system exposed during that crisis. In particular, the international standards set by the Basel Committee have touched every part of the UK prudential regime: the quantity and quality of regulatory capital; requirements for liquidity and leverage; and the way we measure risks.

We published our rules implementing the Basel 3.1 standards in January this year and we have now passed the baton to firms, which have until the start of 2027 to ensure they are ready. This represents a key milestone in that long international process to rebuild the regulatory foundations of the UK banking system.

Alongside Basel, the UK introduced the ring‑fencing regime, structurally separating core retail banking from certain wholesale and investment activities within groups. This reform was designed to prevent shocks in one part of a group from destabilising essential retail services.

Together, these reforms have increased the stability of the UK financial system and rebuilt confidence in the banking sector. This has allowed the sector to withstand multiple shocks in recent years, such as the Covid pandemic and multiple geopolitical events, whilst maintaining its support to customers and the broader economy. In line with that, the strength of the UK banking system and its regulatory framework is recognised internationally as an important asset for the UK.

Despite these changes, events in recent years have reminded us that confidence can still erode quickly under the wrong conditions and that, as the financial system evolves, the framework must evolve too. In line with our objectives, evolving the framework involves balancing resilience, efficiency, effectiveness, and proportionality.

So, after building that post‑crisis resilience, in recent years our focus has increasingly turned to efficiency and proportionality. For us this means examining whether parts of the regime have become overly complex, whether some requirements can be better targeted, and whether we can achieve the same or better prudential outcomes with fewer unintended burdens. It also means ensuring that the prudential regime facilitates innovation while retaining the resilience we have built. That approach is entirely consistent with our objective to facilitate competitiveness and growth.

We have taken many steps already. To name but a few, we have introduced the Strong and Simple regime, which represents a major simplification of the capital and liquidity framework for smaller domestic deposit takers. We have also made significant changes to remuneration rules, including deleting the bonus cap and shortening deferral periods, and we are streamlining regulatory reporting requirements and supervisory processes.

But much more is underway – and that is where I will focus now. I will speak about the initiatives in our pipeline across the three foundations I mentioned before: maintaining trust in the UK financial system, operating efficiently and ensuring proportionality and being responsive to new developments.

Maintaining trust in the UK financial system 

The FPC’s assessment of bank capital requirement 

Let me begin with trust and, in particular, with one of the most significant pieces of work on our workplan: the FPC’s assessment of bank capital requirements.

The December Financial Stability Report set out an updated assessment of the appropriate capital requirements for the UK banking system.^footnote[1] As part of this, the FPC cut its key benchmark assessment of Tier 1 capital requirements from 14% to 13% of risk‑weighted assets. This adjustment reflects changes in the financial system, with some banks becoming less systemically important, risks on UK banks’ balance sheets falling, and improvements in risk measurement. Since then, a question I have been asked on several occasions is: what does this 13% mean? Does it translate into an automatic reduction in requirements?

The 13% represents the FPC’s judgement as to the sector‑wide capital requirements that will best support long‑term UK growth as measured through GDP. It does this by balancing the benefits of capital in reducing the risks of financial crises and the costs of capital in making it more expensive for banks to lend and support their customers’ needs. Simply put, too little capital increases the risk of a financial crisis to an unacceptable level, and too much capital can be detrimental by constraining the supply of financial services to households and businesses.

The 13% is a benchmark and is intended to provide clarity and certainty over the future direction of capital requirements for the UK banking sector as a whole. By doing so, the announcement was designed to give firms confidence to align their target capital ratios more closely with regulatory requirements and to deploy any excess capital in support of lending and growth. Whilst firm‑specific requirements obviously depend on the risks on a firm’s balance sheet, our bottom‑up processes for defining those requirements are aligned with the FPC’s top‑down judgement. So, the 13% benchmark will be realised from 2027, when Basel 3.1 is implemented.

In addition, we are focusing on three priority areas of further work.

The first is buffer usability. Regulatory buffers account for just under half of risk‑weighted capital requirements. But experience – including during the Covid period – suggests that banks can be reluctant to use their buffers in practice. We are exploring further ways to help ensure buffers can operate as they were designed to: as a capital cushion that can be drawn down in stress, allowing banks to absorb losses while maintaining the provision of credit to households and businesses.

We think a range of factors contribute to the reluctance to use buffers, and we are analysing the extensive feedback we received earlier this month. But to the extent that we can reduce the incentives for firms to maintain excess capital by making buffer usability more credible, there is scope to support a meaningful expansion in lending.

A second key element is reviewing the leverage ratio – specifically, how it has been implemented in the UK, how it is operating in practice, and how it interacts with the broader framework. When the leverage ratio was introduced in 2015, it was envisaged that risk‑weighted requirements would be the binding constraint for most UK banks most of the time. However, declines in average risk weights mean that the leverage ratio has become the binding constraint for more firms. We are currently doing analysis, informed by stakeholder feedback, as to why this is the case. We are also looking at the areas, highlighted in the December Financial Stability Report, in which our leverage requirements differ from other financial centres and the international framework set in Basel. This analysis will underpin any action we choose to take in this space.

A third area of focus is how domestic capital requirements interact, including the Countercyclical Capital Buffer (CCyB), the buffers we require systemically important firms to hold, and Pillar 2A requirements related to geographic credit concentration. Each of these serves a distinct purpose, but all are calibrated using measures linked to domestic exposures. We want to ensure that, taken together, these requirements operate coherently and do not unduly constrain lending to the real economy.

We have had extensive stakeholder engagement on all of these issues, including roundtables, bilateral discussions, written submissions, and a day‑long stakeholder engagement event at the Bank of England.^footnote[2] The latter brought together different views from firms, academics, investors, and rating agencies. We are now reviewing that input and will set out our next steps in the July Financial Stability Report.

Basel 3.1: Market Risk

Another priority for this year, central to maintaining trust in the UK financial system, is finalising the UK implementation of the market risk element of the Basel rules, sometimes referred to as the Fundamental Review of the Trading Book.

Our rules in this space are designed to address several weaknesses revealed during the global financial crisis and to modernise the way banks measure and manage market risk. They introduce a much clearer and more objective boundary between the trading book and the banking book, ensuring risks sit in the part of the framework designed to capture them. They also create a far more risk‑sensitive standardised approach that acts as a credible alternative to modelling. Those parts come into force on 1 January 2027.

But when we published the bulk of our Basel 3.1 package in January, one component remained outstanding: the internal models part of the market risk framework.

Here, our rules will replace the existing internal model approach with a more coherent system that better reflects market liquidity and requires firms to demonstrate, desk by desk, that their models accurately capture risk – with non‑modellable risks capitalised separately.

We held this element back to take account of developments in other jurisdictions and to ensure our approach aligns with our commitments to stability, proportionality, and the competitiveness of the UK. We now have proposals from the US, published last month, and updated proposals from the EU. This puts us in a strong position to consider the implications for our own implementation, which is planned for January 2028, and we will provide a further update in the summer.

Liquidity 

Another initiative I want to highlight is our work to modernise the UK’s prudential liquidity framework. We have recently consulted on a set of reforms, drawing on lessons learned from events in recent years, which my colleague Phil Evans set out in a speech last month.^footnote[3]

We want to ensure our liquidity rules keep pace the ways in which the banking sector has changed – from the speed of digital outflows to the Bank’s move toward a more demand –driven, repo‑led approach to supplying reserves. Getting this right is essential to maintaining trust and confidence in the system, without imposing unnecessary costs on firms or holding back balance‑sheet growth. 

Operating efficiently and ensuring proportionality 

Ring‑fencing 

The second foundation I mentioned is about operating efficiently and ensuring proportionality. This principle underpins our current work on ring‑fencing, which remains an integral part of the UK prudential regime. As part of the “Leeds Reforms” announced last July, the Chancellor committed to ‘meaningful reforms of the ring‑fencing regime, recognising that now is the time to go further in tackling inefficiency and boosting growth while retaining the aspects of the regime that support financial stability and protect consumers’ deposits.^footnote[4] Since then, we have been working closely with HMT to support that work, the outcomes of which will be announced in due course.

Supporting first time buyers and increased mortgage lending 

We are also considering proportionality in relation to household lending. Last year the FPC recommended changes to how the loan‑to‑income (LTI) flow limit is implemented. The policy is designed to prevent too much mortgage lending in aggregate going to high‑LTI borrowers across the economy as a whole, and thereby reduce the risk of unsustainable levels of household debt that can amplify reductions in consumption when shocks hit. The overarching aim of our policy hasn’t changed: keeping high‑LTI lending in aggregate at around 15% to guard against excessive household indebtedness. But the FPC recognised that firm‑level caps can be unnecessarily restrictive when the system as a whole is well below that level. To ensure that change could take effect immediately, we put in place an interim process whereby firms could apply to waive the rule.

To put this change on a permanent footing, we launched a consultation at the start of the month on removing the firm‑specific 15% cap and giving lenders more flexibility to set their own high‑LTI strategies, aligned with their business models and risk appetite. As long as the aggregate remains consistent with 15%, firms will be free to lend above that level. To support firms’ planning, we will publish the aggregate high‑LTI flow each quarter.

If the aggregate rises above 15%, we may ask firms with higher shares to adjust gradually back towards the limit. The consultation sets out how this would work in a smooth and predictable way, and we will keep the existing interim waiver arrangements in place until the new rules take effect.

Overall, these proposals preserve resilience while giving firms more flexibility, supporting competition, innovation, and – importantly – homeownership. We expect to finalise the policy later this year.

Supporting effective securitisation markets 

Now, turning to securitisation. Since 2019 we’ve been operating under a prescriptive regime settled in the post‑crisis aftermath which, as the industry told us, created a lot of administrative work without adding much in terms of safety and soundness. We are therefore consulting on material reforms to make the conduct rules more proportionate, while maintaining appropriate prudential and general safeguards.

These conduct rules exist in both the PRA Rulebook and FCA Handbooks, therefore we are working closely with the FCA. We intend to publish the final rules by the end of 2026.

In January we also finalised some targeted changes to the securitisation capital requirements, including making the securitisation standardised approach more risk‑sensitive, which will be effective from January 2027.^footnote[5]

Keeping thresholds in our regime current and relevant 

We also believe we can improve proportionality by keeping the thresholds in our regime current and relevant. The PRA rulebook contains a wide range of thresholds which are generally used to partition a more proportionate treatment for some firms. For example, the threshold for application of the leverage ratio requirement. As the economy grows, unless those thresholds are updated, the set of firms getting the more proportionate treatment reduces. Mid‑sized firms, for example, have told us that the way regulatory thresholds are set might prevent them from scaling up – so we are doing work to embed proportionality in this area. We have recently updated thresholds in areas such as the depositor-protection limit, MREL and the leverage ratio so that requirements move in line with the growth of the economy, rather than becoming unintentionally tighter over time. 

We are now looking at whether we can take this further by introducing a more systematic, automatic approach to updating the many regulatory thresholds that are currently set in nominal terms and determine which parts of the regime apply to which firms. We plan to publish proposals over the summer. We think this is the right direction of travel: greater predictability around thresholds gives firms more confidence in planning, avoids unnecessary cliff‑edges, and supports growth. 

Future of Banking Data (FBD) 

Regulatory reporting burden remains a major area of focus for the PRA. I’ve already mentioned some of the work we’ve done to ease that burden on banks. Last year, for example, we removed 37 underutilised templates – a targeted but meaningful first step, and there is much more to do.

In February, we published a discussion paper setting out how we use data today, the challenges with current reporting collections, and the principles that should guide future reporting. We call this our Future Banking Data programme. As my colleague Vicky White set out in a recent speech, its aim is straightforward: to deliver tangible cost reductions in regulatory reporting while improving the relevance, quality, and timeliness of the data we collect.^footnote[6]

Alongside the discussion paper and the templates we have already deleted, we are also developing and testing a new firm engagement portal for banks and building societies, which will allow certain forms to be submitted more efficiently. Once the portal itself is rolled out to all firms, we expect to extend the number of forms covered over time. We are also assessing how UK mortgage data collections can be rationalised. This is a long‑term programme, but one that we believe will deliver material benefits for firms and for how we use the data they submit. 

Facilitating the use of Internal Rating-Based models 

We have also been working on our approach to Internal Ratings Based (IRB) models, which are key to how banks, especially the larger ones, measure credit risk. We have observed and received feedback that some medium-sized firms face challenges in developing IRB models that meet our requirements and expectations, because they lack historic data or due to the complexity of the IRB framework itself. In 2025 we therefore published a discussion paper focused on ways of addressing these barriers which can inhibit effective competition. This is a highly technical area and we received many responses which we are working our way through ahead of bringing forward policy proposals later this year. These proposals would help medium‑sized firms to scale up, while also ensuring that finance is appropriately channelled to creditworthy households. 

At the same time, we have also been focused on enhancing our IRB model review process to be more responsive and agile. We have introduced quicker timelines to approve IRB models – six months for any material model change. We also enhanced our pre-application engagement for all firms and nominated dedicated account managers for firms applying for IRB model permissions for the first time to boost technical support during the process. Collectively, these enhancements are designed to deliver greater predictability and efficiency for IRB model reviews, while reinforcing that high quality submissions and timely engagement are essential to their successful implementation. 

Being responsive to new developments 

Digital money and tokenised assets 

Finally, I said we want to be responsive to new developments, and this also means creating the conditions for innovation to develop responsibly, because that can have a very significant impact on growth.^footnote[7]

Here we have been working closely with colleagues across the Bank and the FCA on developments in digital money and tokenised assets, including the Bank’s proposed regulatory regime for systemic stablecoins. We welcome the benefits that innovation and competition can bring in this space. In line with that, we issued guidance in 2023 on the ways in which we expect banks to engage with new forms of money. This included the conditions for them to issue products like tokenised deposits or stablecoins, whilst ensuring their customers can easily understand differences in the way their money is protected. Given the innovative and fast‑moving nature of these markets, we keep that guidance under review.

Another area we are focusing on is the prudential treatment of banks’ exposures to cryptoassets. This remains a fast‑moving space internationally, with ongoing work at the Basel Committee, including a targeted review of the global standards. Whilst our proposals to implement the standards in the UK will follow that review, we recognise firms want guidance now. So, we are considering what more we can say in the meantime to clarify our interim expectations of firms, building on a Dear CEO letter we published in 2022^footnote[8], to ensure our regime supports an appropriately risk‑sensitive approach to cryptoassets – particularly where innovation in tokenised assets and stablecoins can responsibly support more efficient financial services. We will provide an update on this before the summer.

Conclusion 

And now, let me conclude.

I have just completed a stocktake of the large amount of policy initiatives relating to bank capital and liquidity that the PRA has in hand – which builds on the extensive work of recent years and is reshaping the UK’s regulatory regime for banks for the decade ahead. This is not work driven in reaction to crises, as happened post‑GFC, but by the opportunity to build on the strengths of the current regime and position it for the future.

In line with our objectives, we aim to preserve the resilience that is essential for safeguarding the system. That resilience is the foundation on which sustainable growth depends. But we also want the framework to be efficient, proportionate, and supportive of innovation – ensuring that the UK remains one of the most competitive and trusted financial centres in the world.

You can expect continued dialogue from us in the months ahead, alongside further publications – including through the July Financial Stability Report and subsequent consultation papers.

Thank you once again for the opportunity to speak today. I look forward to your questions and to continuing our close engagement as this programme of work moves forward.

Thank you.

I would like to thank Andrew Bailey, Nat Benjamin, Sarah Breeden, Jas Ellis, Phil Evans, Charlotte Gerken, Lisa Hammond-Robinson, Rebecca Jackson, Gavin Mills, Derek Nesbitt, Jitendra Patil, Catarina Souza, Elisabetta Vitello, Sam Woods for their assistance in preparing these remarks.