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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is director of the National Institute of Economic and Social Research
UK financial regulators are edging towards an important decision: whether to weaken one of the core safeguards introduced after the global financial crisis.
The leverage ratio requires banks to fund themselves with a minimum amount of loss-absorbing capital relative to their overall exposures. While risk-weighted capital rules are based on how risky a loan or security is deemed to be, the leverage ratio asks a blunter question: how large is the balance sheet relative to the capital that can absorb losses? This simplicity is a feature not a bug.
The leverage ratio exists because risk-weighted capital rules failed catastrophically in 2007-08. It is a check on the tendency of risk models to make the world look safest just before it proves most dangerous. That tendency has not gone away.
The Bank of England estimates that major UK banks’ average risk weights have fallen 7.5 percentage points since 2016. It is very difficult to tell how much of this reflects a genuine de-risking of the banking system, model optimisation, regulatory arbitrage or simply miscalibrated risk weights. Either way, the decline means the risk-weighted regime now implies that banks require about £60bn less tier one capital than would otherwise have been the case.
There are two responses to hearing such an alarm: investigate why risk weights have fallen and recalibrate any that have fallen too far, or ignore it, in effect removing the batteries.
The technical dispute is over a component of the UK’s leverage ratio framework called the countercyclical leverage buffer, which requires more capital when risks to financial stability are building and less when economic conditions are depressed.
In essence, when the BoE eases the required countercyclical capital buffer, part of that move is mirrored in the leverage framework. The logic of doing this is sound: it helps ensure that when the BoE releases capital in a downturn, leverage constraints do not stop that capital being usable. The industry argues, correctly, that this goes beyond Basel minimum standards. But line-by-line Basel equivalence is the wrong test. The right question is whether the whole package delivers adequate resilience for the UK banking system.
Here’s the problem: all the major financial stability reports published in recent months have been replete with warnings about elevated risks — from equity valuations to the Iran war; from private markets to cyber risks. This is not an obvious moment for thinner defences.
At the same time, banks do not need an invitation to increase leverage. Earlier in the year, US regulators chose to ease their leverage ratio rules; in the same quarter, all major US “global systemically important banks” reported falls in their leverage ratios. Closer to home, all major UK banks except NatWest reduced their leverage ratios in the first quarter of 2026.
Underlying the banking lobby’s case is a level-playing-field concern: UK banks understandably worry about being disadvantaged relative to US rivals. This competitiveness argument deserves to be taken seriously. But if a major competitor permits more leverage, the global financial system becomes riskier. The UK’s best response may be to preserve a margin of safety against imported instability.
We should be clear about who is likely to benefit from an easing of the UK’s leverage rules. The BoE’s credit conditions survey does not suggest bank credit supply is scarce; over recent quarters, credit availability has been broadly stable or improving. The Financial Policy Committee recently judged that there was no evidence of banks restricting lending because of capital constraints. When credit supply is not binding, lower capital requirements are more likely to boost shareholder distributions than real-economy lending. Last year, major UK banks returned about £30bn in dividends and buybacks. There is nothing wrong with returning capital to shareholders — but not at the cost of resilience underwritten by the taxpayer.
This is unlikely to be the last request. Once the principle is conceded that short-term competitiveness trumps resilience, pressure will build to go further.
Financial crises are extraordinarily costly events. Britain is still living with the economic, social and political consequences of 2008. With public debt already high, the state’s capacity to cushion a future financial meltdown is more limited than it was before the last crisis. A robust leverage ratio backstop is one of the central lessons of the global financial crisis. The BoE should resist calls to weaken it.
