The leverage ratio backstop debate

"When you look at the world now, does it look more uncertain or less uncertain?" In December 2025, the Bank of England's Financial Policy Committee (FPC) answered that question by cutting the equity capital requirement for UK banks. David Aikman (NIESR) and John Vickers (University of Oxford), two former senior Bank insiders who helped to design the regulatory framework post-GFC, think the committee got it wrong.

The FPC lowered the benchmark capital requirement from 14% to 13% of risk-weighted assets, a move that could free up roughly £30 billion of capital across the UK banking system. Aikman and Vickers see no compelling economic reason for the change. They argue that the 2015 benchmark was already set too low, built on questionable assumptions about how well resolution frameworks would work. Since 2015, Brexit, the pandemic, and a sharply stretched fiscal position have all increased the likely cost of a future crisis. The practical effect of the loosening may not even be more lending, but higher dividends and share buybacks. And the December decision may signal a weakening of the leverage ratio backstop, the constraint that limits bank borrowing regardless of how risk weights are applied.

The research behind this episode:

Aikman, David, and John Vickers. 2026. "The Bank of England's Capital Mistake." VoxEU, 15 January 2026. 

To cite this episode:

Phillips, Tim, David Aikman, and John Vickers. 2026. "The Bank of England's Capital Mistake." VoxTalks Economics (podcast). 

Assign this as extra listening. The citation above is formatted and ready for a reading list or VLE.

About the guests

David Aikman is Director of the National Institute of Economic and Social Research (NIESR). He worked at the Bank of England from 2003 to 2020, where he served as Technical Head of Division in Financial Stability and was centrally involved in the creation of the Financial Policy Committee. His research spanning macroprudential regulation, systemic risk, and the macroeconomics of financial crises has made him one of the leading academic voices on bank capital policy in the UK.

Sir John Vickers is Warden of All Souls College and Professor of Economics at the University of Oxford. He served as Chief Economist and a member of the Monetary Policy Committee at the Bank of England, and chaired the Independent Commission on Banking from 2010 to 2011, which recommended substantially higher capital requirements than those subsequently adopted. His research spanning industrial economics, competition policy, and financial regulation has shaped UK banking policy for two decades.

Research cited in this episode

Equity capital requirements specify the minimum proportion of a bank's assets that must be funded by shareholders' equity rather than borrowed money. Equity is the only form of funding that can absorb losses without triggering insolvency: if a bank suffers unexpected losses, its shareholders bear them first. In the run-up to the 2008 financial crisis, some large institutions held equity equivalent to as little as two or three percent of their total exposures, implying leverage of up to forty times; a small shock was enough to render them insolvent. The post-crisis repair effort was designed to ensure that could not happen again.

Risk-weighted assets (RWAs) are the denominator against which capital requirements are measured. Rather than applying the capital ratio to the raw value of all assets, the framework deflates each asset by an estimated risk factor: a mortgage backed by collateral is treated as less risky than an unsecured corporate loan, for example. Capital requirements are then expressed as a percentage of this risk-adjusted total. The approach creates significant complexity and depends heavily on the accuracy of the risk weights; much of the story of 2008 was that regulators allowed banks to attach implausibly low risk weights to their exposures, understating the true leverage in the system.

The Financial Policy Committee (FPC) is the Bank of England body responsible for macroprudential oversight of the UK financial system. Created in 2013, it sits above the individual regulators to take a system-wide view of whether risks are building and whether the financial system as a whole has adequate resilience. One of its primary tools is setting the overall capital requirement benchmark for UK banks. In 2015 it set that benchmark at 14% of risk-weighted assets; in December 2025 it reduced it to 13%.

The leverage ratio is an alternative measure of bank capitalisation that does not apply risk weights. It expresses equity as a simple percentage of total assets, regardless of what those assets are. The UK leverage ratio backstop currently stands at around 3 to 4%, implying maximum leverage of roughly twenty-five to thirty times for systemically important banks. Vickers and Aikman note that for some UK banks the backstop has become the binding constraint, which they regard as a warning sign: it suggests that risk-weighted measures are understating actual leverage, not that the backstop should be relaxed.

Resolution frameworks are the legal and operational mechanisms that allow regulators to manage the failure of a bank without a taxpayer bailout, by imposing losses on shareholders and creditors in an orderly way. A central assumption in the FPC's 2015 capital benchmark was that resolution would work effectively in a future crisis, which justified a lower capital requirement. Vickers and Aikman are sceptical: the experience of Credit Suisse in 2023, which required a state-assisted rescue despite the existence of resolution plans, illustrates that orderly resolution of a major institution cannot be taken for granted.

Basel 3.1 is the latest package of international banking regulatory standards agreed by the Basel Committee on Banking Supervision, designed to address weaknesses in how risk weights are calculated. Its implementation in the UK is scheduled for 2027, nineteen years after the 2008 crisis. The FPC's December 2025 decision is partly contingent on Basel 3.1 being implemented as planned; Aikman notes that there have been repeated international delays and rollbacks, and that the UK's ability to move ahead unilaterally is constrained by what other major jurisdictions do.

The 2023 banking stress saw three US regional banks (Silicon Valley Bank, Signature Bank, and First Republic) fail in quick succession in March 2023, followed by the forced rescue of Credit Suisse by UBS. These events occurred in what was, by historical standards, a relatively stable macroeconomic environment. Vickers cites them as evidence that banking sector vulnerabilities have not been eliminated by post-2008 reforms, and as a caution against complacency about the effectiveness of current safeguards.

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