The Bank of England governor, Andrew Bailey, has attempted to reassure that the lessons of the 2008 financial crisis have not been forgotten, as he announced plans to loosen capital rules for high street banks for the first time since the global crash.

The central bank announced on Tuesday that it will lower capital requirements related to risk-weighted assets by one percentage point to about 13%, reducing the amount lenders must hold in reserve.

Capital requirements act as a financial cushion against risky lending and investments on bank balance sheets.

The Bank’s lower requirements, which are due to come into force in 2027, are designed to make it easier to lend to households and businesses.

However, it risks stoking concerns about weakening protections against UK bank failures, as the government continues to row back on regulations introduced after the financial crisis.

When asked whether the Bank was sowing the seeds of the next financial crisis, Bailey assured that the cut to capital rules was a “sensible reflection of the health of the banking system” and that the lessons of the crash were not lost on the regulator.

“I understand fully that the financial crisis is disappearing into the rear view mirror … but we do have to continue to maintain the lessons of the financial crisis – and sometimes people say to me, ‘that’s all over and dealt with’ and I say well we’ve dealt with it in the medium term but actually the lessons of it persist,” he said during a press conference.

Fresh stress tests showed that the UK’s seven largest banks – Barclays, HSBC, Lloyds Banking Group, Nationwide, NatWest, Santander UK and Standard Chartered – are strong enough to continue lending through “a severe but plausible” economic downturn.

The Bank said its proposed new capital rules were “consistent with its view that the banking sector can support long-term growth in the real economy in both current and adverse economic environments”. It added that banks had tended to hold more capital than required, meaning that money was not used to issue loans.

The central bank had announced in June it would be reviewing capital levels, having first assessed them in 2015 and issued an update in 2019. It said that since the capital levels were last reviewed, banks had managed to continue issuing loans and mortgages despite “several macroeconomic shocks” including Covid and Russia’s full-scale invasion of Ukraine.

The chancellor, Rachel Reeves, has put extra pressure on regulators to do more to stimulate growth, having this summer gone so far as to say rules and red tape were a “boot on the neck” of businesses and risked “choking off” innovation across the UK.

Reeves appeared to subtly encourage cuts to bank capital requirements last week. In letter to Bailey, released alongside the budget, she said she welcomed the review of bank capital requirements, adding that the process should “ensure the UK’s capital framework strikes the optimal balance to deliver resilience, growth and competitiveness”.

There will also be pressure on banks to do more to support the UK economy after they narrowly escaped higher taxes and emerged as among the biggest winners from the budget.

While there are no explicit rules on how banks use the extra funding, meaning bosses could use the cash to pay shareholders if so inclined, Bailey said banks would benefit in the long term if they used the capital to lend.

“Obviously it’s not for us to dictate to banks how they run their business … But I would emphasise that there is a two-way relationship here. If the banks support the economy by lending, that will strengthen the economy and banks will actually benefit from that in performance and return … and I would expect that they would have that very much in mind,” Bailey said.

Tuesday’s announcement is the first time that bank capital levels have been cut since the 2008 banking crash, and comes despite warnings from the Bank’s financial policy committee (FPC) that “risks to financial stability have increased during 2025”.

That includes risks regarding the rise in valuations of artificial intelligence companies this year, which the FPC said “heightens the risk of a sharp correction”. Meanwhile, those AI firms have been taking on much more debt in order to build datacentres and compete in the global tech race, leaving the financial sector exposed if the AI bubble bursts.

“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,” the Bank’s financial stability report said.

Sarah Breeden, the Bank’s deputy governor for financial stability, said that the cuts reflected the “evolution” of the financial system, but that, barring any other major changes, “it would be unwise to reduce our benchmark further.”

The Bank also confirmed details of stress tests for the private credit industry. The tests are meant to assess potential systemic risks of the unregulated sector, particularly interconnectivity with regulated banks, amid concerns over potentially weak lending standards.

Bailey said last month that the failures of US auto firms linked to the private credit sector had worrying echoes of the sub-prime mortgage crisis that kicked off the financial crisis.

The IMF has warned that a downturn in the private credit sector could have ripple effects across the financial system, given that banks are increasingly exposed to a largely unregulated private credit industry. There are concerns that a downturn could destabilise traditional banks that issue loans to the shadow banking sector.