The Bank of England has cautioned that risks to the UKs financial system have risen over the past year, even as it judged that banks, households and companies are generally strong enough to withstand a range of shocks. In its latest Financial Stability Report, the Banks Financial Policy Committee (FPC) said that elevated global vulnerabilities, rapid growth in private markets and an intensifying cyber threat are all adding to the risk backdrop.

The FPC said overall risk conditions in 2025 had become more challenging, pointing to tighter global financial conditions and signs of stress in some overseas corporate credit markets. Recent defaults in US corporate debt markets were highlighted as a reminder of the need for robust risk management among lenders and investors, particularly where leverage is high. The Committee warned that a sharp deterioration in global markets, or a disorderly repricing of risk, could quickly spill over into UK funding conditions.

UK banks well capitalised as buffers maintained

Despite the tougher risk outlook, the Bank said the UK banking system remained "well capitalised" and profitable, with major lenders average price-to-tangible book ratios now above one, indicating renewed investor confidence. Stress tests and regulatory capital requirements mean banks should be able to absorb losses and continue lending in a severe downturn, according to the report.

The FPC confirmed that it is keeping the countercyclical capital buffer (CCyB) at its neutral setting of 2%, signalling that it sees no need either to tighten or loosen macroprudential capital requirements at this stage. It noted that, while the global risk environment is elevated, overall indebtedness among UK households and corporates remains relatively low by historical standards.

Households and businesses broadly resilient, but pockets of strain

The report judged that UK households and non-financial businesses continue to show resilience, supported by rising real incomes, previous deleveraging and a gradual easing in domestic credit conditions. However, the Bank underlined that some highly leveraged firms and more vulnerable households could still come under significant pressure if interest rates or unemployment were to rise sharply, or if growth were to weaken further.

Corporate net debt relative to earnings remains below the peaks seen after the global financial crisis and during the pandemic, at around 134% compared with 230% and 166% respectively, which has helped contain default risk so far. Even so, the FPC warned that a sudden deterioration in global financial markets could cause vulnerabilities to crystallise, especially for companies relying on short-term or risk-sensitive funding.

Private markets under scrutiny

The Bank placed particular emphasis on the rapid expansion of private credit and other private market investments, which have become an increasingly important source of funding for companies and a growing asset class for insurers and pension funds. It cautioned that these markets have yet to be tested through a broad-based economic downturn at their current scale, raising questions about liquidity, valuation and interconnectedness.

To better understand and address these risks, the Bank plans to conduct a system-wide exploratory scenario focusing on the private markets ecosystem. This exercise will examine how shocks to asset prices and financing conditions could propagate through non-bank financial institutions and feed back into the real economy and the banking sector.

Cyber and operational resilience in focus

Alongside market risks, the FPC highlighted a heightened cyber and operational threat landscape as financial firms digitise and rely more heavily on complex technology and third-party providers. In a joint discussion with the Prudential Regulation Committee, the Financial Market Infrastructure Committee and the Financial Conduct Authority, policymakers agreed to step up coordination on enhancing operational resilience across the financial system.

The Bank urged boards of banks, insurers, asset managers and market infrastructures to use the findings from sector-wide exercises and stress tests including simulations such as SIMEX and the Cyber and Operational Resilience Stress Test to strengthen their ability to withstand and recover from major disruptions.

Unlocking more productive investment

The FPC also set out how recent regulatory reforms could help channel more long-term capital into the UK economy, particularly in areas that support productivity and growth. It noted that changes to Solvency UK are intended to give insurers greater flexibility to invest in long-term, illiquid assets, provided they meet eligibility criteria under the "matching adjustment" framework.

Members of the Association of British Insurers have committed to using these reforms to invest at least 100bn in UK productive assets over the next decade, including infrastructure, housing and growth companies, the report said. The FPC added that UK insurers currently report a shortage of suitable domestic opportunities that fit their risk-return objectives, which has resulted in more capital flowing overseas rather than into the UK real economy.

The Bank also welcomed progress on the Mansion House Compact and Mansion House Accord, under which major pension providers aim to increase allocations to unlisted equities and private markets by 2030, with a defined share earmarked for UK-based investments. These initiatives, together with public-private partnership funding programmes and the role of the British Business Bank, are seen as important levers to support high-growth firms and small and medium-sized enterprises.

Reforms to support high-growth firms

The report noted that reforms introduced this year allow ring-fenced banks to take equity warrants as part of their lending to high-growth firms, making such lending more commercially attractive. The Bank is working with the Treasury to consider further adjustments to the ring-fencing regime so that major lenders can offer a wider range of products and services to UK businesses without undermining safety and soundness.

The FPC pointed to a package of measures for entrepreneurship and SME financing announced in the governments Autumn Budget, including an increased emphasis on public-private schemes to crowd in private capital. It argued that, if fully implemented and taken up by industry, these changes could make a material contribution to the UKs weak productivity performance over time.

Balancing resilience and growth

Overall, the Financial Stability Report portrays a financial system that is more robust than in previous crises, but facing a more complex mix of risks spanning global markets, non-bank finance, cyber threats and structural shifts in investment flows. Policymakers are attempting to strike a balance between preserving resilience and freeing up capital to support investment, innovation and growth.

The Bank indicated it would continue to monitor closely the interaction between tighter global financial conditions, domestic credit supply and the health of non-bank financial institutions. It reiterated that it stands ready to take macroprudential action if necessary to safeguard UK financial stability, while encouraging industry to make full use of new flexibilities to support the real economy within a robust risk management framework.