Bank of England Holds Countercyclical Capital Buffer at 2 Percent

The Bank of England kept the UK countercyclical capital buffer rate at 2 percent in the Financial Stability Report published July 7. The Financial Policy Committee judged that UK households and corporates remain resilient in aggregate and that the banking system is appropriately capitalised.

It noted that vulnerabilities in risky asset valuations, sovereign debt and credit markets have become more pronounced.

UK household and corporate aggregate indebtedness remains low relative to historical averages. Equity prices have risen, particularly for AI-related stocks, accompanied by a substantial increase in leverage in equity markets and a significant rise in hedge fund leverage.

AI-related companies have accelerated their use of public markets, private credit, leveraged and structured finance at a pace the committee described as unprecedented historically.

Redemption requests have risen in several retail funds, with some limiting withdrawals. Global sovereign bond issuance stands at historically high levels, with higher proportions issued at shorter maturities, while debt-to-GDP ratios continue to trend upwards. Those assessments followed the Middle East conflict that began in late February 2026.

The conflict closed the Strait of Hormuz and damaged energy infrastructure, driving oil prices to fluctuate around $100 per barrel for several months. A Memorandum of Understanding signed by the United States and Iran in June 2026 set a 30-day period for restoring traffic through the strait and a 60-day period for further negotiations.

Energy prices later fell back to just above pre-conflict levels.

During the most volatile period after the conflict began, moves in gilt yields were amplified by hedge fund deleveraging. Frontier AI models are increasingly capable of identifying and exploiting software vulnerabilities at greater scale. The Bank of England, Financial Conduct Authority and HM Treasury issued a joint statement on frontier AI models in May 2026.