The Bank of England has cautioned that the overall risk outlook facing the UK financial system has deteriorated this year, pointing to mounting stresses in global credit markets and the rapid growth of opaque private assets, even as it underlined that banks and borrowers at home remain resilient. In its latest Financial Stability Report, the Banks Financial Policy Committee (FPC) said risks to financial stability "have increased in 2025" and warned that potential shocks in global markets could expose vulnerabilities among highly leveraged borrowers and investors.

Despite the darker global backdrop, the FPC judged that the core of the UK financial system is robust. Major UK banks, it said, remain well capitalised, continue to post strong earnings and now trade at average price?to?tangible book ratios above one, a level that signals renewed investor confidence in their balance sheets. The committee left the countercyclical capital buffer (CCyB) at its neutral rate of 2%, arguing that this level strikes the right balance between resilience and the need to support lending to the real economy.

The Bank highlighted that, at an aggregate level, UK households and businesses have kept their debt burdens in check. Corporate net debt stands at around 134% of earnings, comfortably below its peak during the pandemic and after the global financial crisis, when it reached 166% and 230% respectively. Household indebtedness also remains relatively low by historical standards, helped by a combination of slower credit growth and higher saving rates in recent years.

However, officials stressed that this aggregate picture masks pockets of vulnerability. The report singles out highly leveraged companies and borrowers who took on debt at low interest rates and are now facing higher refinancing costs. Recent corporate defaults in the United States were cited as a warning signal for global investors, underlining the need for more robust risk management practices and closer scrutiny of exposures in high?yield and leveraged loan markets.

One area of particular concern is the rapid expansion of private markets, including private credit and illiquid alternative assets, which have become an increasingly important source of funding for UK and global companies. UK insurers have ramped up their exposure to these assets, often via complex funded reinsurance structures that transfer risk to third?country counterparties. While performance has so far been resilient, the Bank warned that private markets have not yet been tested through a broad?based macroeconomic downturn at their current size and level of interconnectedness.

To address those risks, the Bank plans a System?Wide Exploratory Scenario exercise focused specifically on the private markets ecosystem, assessing how shocks could propagate through insurers, pension funds, asset managers and their financing channels. The FPC has also called for closer international cooperation on operational resilience, reflecting concerns that cyber attacks or critical third?party failures could disrupt cross?border financial services.

Alongside its core mandate to safeguard stability, the FPC used the report to emphasise how regulatory reforms are being deployed to support long?term economic growth. The Prudential Regulation Authoritys overhaul of the UK version of Solvency II, known as Solvency UK, is intended to make it easier for insurers to allocate capital to productive investments, particularly through changes to the Matching Adjustment regime. A new "Matching Adjustment Investment Accelerator" is designed to help insurers invest more in long?dated assets such as infrastructure, housing and green projects.

Industry has responded with headline commitments. Members of the Association of British Insurers have pledged to use the new rules to channel at least 100bn into UK productive assets over the next decade, an inflow the Bank said could make a "significant" contribution to improving the countrys weak productivity growth if fully realised. The FPC said it would continue to work with the Treasury and industry to ensure investment structures can qualify for Matching Adjustment treatment without undermining prudential standards.

The report also charts progress on the government?backed Mansion House reforms, which aim to unlock more pension savings for high?growth businesses and unlisted companies. The share of investments in unlisted equities held by participating funds has risen from 0.36% in 2024 to 0.6% this year, while 17 of the largest workplace pension providers have signed the Mansion House Accord, committing to invest at least 10% of default defined contribution funds in private markets by 2030, with around half of that earmarked for UK assets. The FPC said these shifts could broaden access to long?term risk capital for start?ups and scale?ups, provided investors are transparent about fees and risks.

In parallel, rule changes introduced earlier this year allow ring?fenced banks to take equity warrants when lending to high?growth firms, an innovation the Bank believes will make financing innovative businesses more commercially attractive. Officials are working with the Treasury on further potential adjustments to the ring?fencing regime to enable large retail banks to offer a wider range of products and services to UK companies, while maintaining safeguards introduced after the financial crisis.

Technology is another core strand of the Banks agenda. The report points to joint public?private efforts to modernise the payments system through a National Payments Vision, alongside the central banks own artificial intelligence consortium and the Financial Conduct Authoritys AI Lab "Live Testing" service. These initiatives are intended to support the "responsible" adoption of AI and other digital tools across the financial sector, with the aim of improving efficiency and competition without compromising consumer protection or resilience.

The FPC also welcomed a package of measures to support entrepreneurship announced in the latest Autumn Budget, including new public?private partnership schemes to improve access to finance for high?growth firms and small and medium?sized enterprises. The British Business Bank was singled out as having a potentially larger role to play in channelling long?term capital to innovative companies and in crowding in private investment.

On the credit side, the Bank noted that funding conditions have eased over recent months, with credit spreads tightening from the levels seen earlier in the year. That has translated into somewhat more benign financing costs for companies and modest improvements in mortgage availability for households, reinforced by clarifications to the Financial Conduct Authoritys mortgage rules and tweaks to the FPCs own recommendation on loan?to?income limits. Even so, policymakers warned that an abrupt reversal in global risk sentiment could quickly widen spreads again, underscoring the importance of maintaining strong bank capital and liquidity buffers.

Against that backdrop, the FPCs central message is one of guarded confidence. The UK financial system, it argued, has so far absorbed a succession of global shocks, from higher interest rates to geopolitical tensions, without a major disruption to the supply of credit or core market functioning. But with vulnerabilities building in parts of the global system, particularly in private markets and leveraged credit, the Bank is clearly signalling that it intends to keep a tight grip on macroprudential policy while using its expanded toolkit to steer more capital into the productive investments that will underpin the UKs long?term growth.