Financial Stability Report From the Bank Of England

2nd December 2025

The Financial Policy Committee (FPC) seeks to ensure the UK financial system is prepared for, and resilient to, the wide range of risks it could face so that the system is able to absorb rather than amplify shocks and serve UK households and businesses.

The overall risk environment
Risks to financial stability have increased during 2025. Global risks remain elevated and material uncertainty in the global macroeconomic outlook persists.

Key sources of risk include geopolitical tensions, fragmentation of trade and financial markets, and pressures on sovereign debt markets. Elevated geopolitical tensions increase the likelihood of cyberattacks and other operational disruptions.

In the FPC's judgement, many risky asset valuations remain materially stretched, particularly for technology companies focused on Artificial Intelligence (AI).

Equity valuations in the US are close to the most stretched they have been since the dot-com bubble, and in the UK since the global financial crisis (GFC). This heightens the risk of a sharp correction.

The role of debt financing in the AI sector is increasing quickly as AI-focused firms seek large-scale infrastructure investment. By some industry estimates, AI infrastructure spending over the next five years could exceed five trillion US dollars. While AI hyperscalers will continue to fund much of this from their operating cash flows, approximately half is expected to be financed externally, mostly through debt. Deeper links between AI firms and credit markets, and increasing interconnections between those firms, mean that, should an asset price correction occur, losses on lending could increase financial stability risks.

Credit spreads remain compressed by historical standards. Two recent high-profile corporate defaults in the US have intensified focus on potential weaknesses in risky credit markets previously flagged by the FPC. These include high leverage, weak underwriting standards, opacity, complex structures, and the degree of reliance on credit rating agencies, and illustrate how corporate defaults could impact bank resilience and credit markets simultaneously.

While the impact of these specific defaults has been limited, a diverse range of financial market participants were exposed. Such diversity can help absorb risks, but opacity around the extent of exposures, and their possible interconnections, can also create uncertainty about how widely shocks in credit markets can propagate.

It is important that market participants have a clear understanding of their exposures, including in stress scenarios where correlations and losses can shift outside historical norms. Market participants should also ensure that underwriting standards are robust and that they do not over-rely on credit ratings as a substitute to carrying out appropriate due diligence.

Private markets have grown significantly in the UK over the past two decades and are an important source of funding for corporates. While resilient to date, the private markets ecosystem has not been tested through a broad-based macroeconomic stress at its current size. In order to enhance understanding of the broader risks and dynamics of private markets, the FPC supports the next system-wide exploratory scenario (SWES), focused on the resilience of the private markets ecosystem.

Public debt-to-GDP ratios in many advanced economies have continued to rise this year. Governments globally face spending pressures, given the context of changing demographics and geopolitical risk, potentially constraining their capacity to respond to future shocks. Significant shocks to the global economic or fiscal outlook, should they materialise, could be amplified by vulnerabilities in market-based finance (MBF), such as leveraged positions in sovereign debt markets.

As an open economy with a large financial centre, the UK is exposed to global shocks, which could transmit through multiple, interconnected channels. Stress in one market, such as a sharp asset price correction or correlation shift, could spillover into other markets. Simultaneous de-risking by banks and non-banks can lead to fire sales, widening spreads and tightening financing conditions for UK households and corporates. Market participants should ensure their risk management incorporates such scenarios.

UK household and corporate aggregate indebtedness remains low. The UK banking system is well capitalised, maintains robust liquidity and funding positions, and asset quality remains strong. The results of the 2025 Bank Capital Stress Test demonstrate that the UK banking system is able to continue to support the economy even if economic and financial conditions turn out to be materially worse than expected. This underscores the role of financial stability as a pre-condition for sustainable growth.

As part of ensuring the UK banking sector is both resilient and able to support growth, the FPC has reviewed its assessment of the appropriate level of bank capital requirements (published alongside this FSR, for further details refer to Financial Stability in Focus: The FPC's assessment of bank capital requirements). The Committee judges that the benchmark for system-wide Tier 1 capital requirements, previously judged to be around 14% of risk-weighted assets (RWAs), is now around 13% of RWAs. That judgement is consistent with the evolution in the financial system since the FPC's first assessment in 2015 including a fall in banks' average risk weights, a reduction in the systemic importance of some banks and improvements in risk measurement.

The above is the introduction

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