The Association for Financial Markets in Europe has urged UK regulators to pursue sweeping reforms to bank capital requirements, arguing that current rules constrain lending and risk undermining the country’s competitiveness as a financial centre.

In a submission to the Bank of England’s Financial Policy Committee review, AFME said the existing framework is overly conservative and misaligned with actual risk, limiting banks’ ability to support economic activity. The industry body, which represents more than 150 global institutions, warned that incremental adjustments would not deliver meaningful change.

Caroline Liesegang, managing director of capital and risk management at AFME, said “the FPC’s review is a crucial opportunity to modernise and future-proof the UK’s capital framework so it remains robust while better enabling banks to provide the lending, underwriting and market making activities that support households, businesses and the wider economy.”

AFME welcomed the FPC’s decision to lower its benchmark for Tier 1 capital requirements to 13 per cent from 14 per cent, following strong stress test results among major lenders. However, it argued that structural constraints across the capital stack mean banks remain unable to operate near that benchmark in practice.

According to AFME, binding requirements such as leverage ratios and capital buffers force firms to hold excess capital, reducing their capacity to intermediate in wholesale markets. The group said this dynamic risks weakening liquidity and increasing the cost of capital for UK businesses.

In its response, AFME criticised the leverage ratio as a “clear instance of gold-plating” that “penalises good risk management and creates incentives to invest in higher risk assets”. It added that such constraints could lead banks to shrink balance sheets or scale back activity, limiting the flow of credit into the economy.

The organisation also called on regulators to act within existing international rules rather than waiting for changes to Basel standards. It said reforms should address overlaps between risk-weighted and leverage-based requirements and simplify the capital buffer framework to improve usability.

City AM reported that frustration with the pace of reform extends across the banking sector, with lenders arguing that years of discussion have yet to produce concrete policy changes. The publication said banks believe the current regime undermines the government’s broader growth ambitions.

Simon Ainsworth, banking analyst at Moody’s Ratings, told City AM that recent policy initiatives were “not really going to be moving the dial to a material extent for UK banks”, adding they were “unlikely to be transformative, either for the banking system or as a driver for near term UK economic growth”.

AFME said a more proportionate framework would allow banks to allocate capital more efficiently, supporting lending and investment while maintaining resilience. It added that it stands ready to engage with regulators as the review progresses.

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