The Bank of England unveiled plans on Tuesday to ease a key capital requirement for UK banks in a move designed to support lending and improve financial market resilience during periods of stress, while acknowledging concerns within its own policymaking committee that the changes could increase risks in financial markets.

The proposals, announced by the Bank's Financial Policy Committee (FPC), would lower banks' leverage ratio requirements by around 0.2 percentage points in aggregate by removing the Countercyclical Leverage Buffer from the framework and making a greater share of capital buffers releasable during crises. The Bank said the reforms would make it easier for lenders to continue extending credit and supporting core markets during periods of financial stress while remaining consistent with international standards.

The Financial Stability Report said the leverage ratio had become binding for three of the UK's seven largest banks, leaving some institutions subject to stricter requirements than overseas competitors. The changes are expected to benefit domestic-focused lenders including Lloyds Banking Group, NatWest, Nationwide and Santander UK more than internationally active banks, while consultations on further reforms will begin later this year.

The FPC acknowledged that not all members backed the proposals without reservation. It said "some FPC members were concerned that the proposal might lead to an unwanted increase in market-based leverage, with implications for the resilience of core UK markets", prompting a review of potential safeguards before the wider package is finalised.

The Bank coupled the announcement with fresh warnings about vulnerabilities across the financial system. It said debt used by investment banks to finance hedge fund equity trades had risen 40 per cent over the past year to a record level, while valuations of artificial intelligence-related companies had pushed the price-to-earnings ratio of the S&P 500 to levels "not seen since the dotcom bubble" in 2000. The central bank warned that "the risk of a sharp correction in equity markets remains high".

Bank of England governor Andrew Bailey said rapid advances in frontier AI required closer international oversight because "these models are a big step forward in terms of capabilities, and the threat issue is really a major step forward". He added: "It's important that we work together internationally" to ensure robust testing and protect the interconnected financial system.

Reuters reported that the reforms follow similar moves by US regulators and were welcomed by the Association for Financial Markets in Europe. Jeanie Watson, the trade body's director for capital and risk management, said the leverage framework had become "increasingly binding" and welcomed plans to consult on broader reforms.

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