The 2008 global financial crisis killed the idea that banks could regulate themselves. Governments learned — again — that when a major bank fails, the damage ripples through the entire economy: businesses cannot access credit, savers lose money, and financial markets seize. The regulatory framework that exists today is designed to make that scenario as rare as possible.
Who regulates banks in the UK?
In the UK, bank regulation is split between two bodies. The Prudential Regulation Authority (PRA), which sits within the Bank of England, is responsible for the safety and soundness of individual banks — ensuring they have enough capital and manage their risks responsibly. The Financial Conduct Authority (FCA) focuses on how banks treat their customers — fair pricing, appropriate products, honest marketing. Large banks are supervised by both.
Capital requirements: the foundation
The most important regulation in banking is the capital requirement. A bank's capital is its own money — equity from shareholders and retained profits — that provides a buffer to absorb losses. If a bank makes £10 billion of loans and some go bad, the capital absorbs those losses before depositors are at risk.
International standards for capital requirements are set under Basel III — a global agreement developed after 2008. Under Basel III, banks must hold a minimum Common Equity Tier 1 (CET1) ratio of 4.5% of risk-weighted assets, with additional buffers pushing the effective minimum closer to 8-12% for major banks. UK banks typically hold 15-18% in practice, providing a substantial margin of safety.
Liquidity requirements
Capital protects against solvency risk (losses exceeding capital). Liquidity requirements protect against a different problem: a bank run, where many depositors try to withdraw their money simultaneously. Even a solvent bank can fail if it cannot meet sudden withdrawal demands.
Under the Liquidity Coverage Ratio (LCR), banks must hold enough liquid assets (cash and government bonds that can be sold quickly) to survive a 30-day period of severe stress — defined as a scenario where wholesale funders withdraw money and retail deposits decline. UK banks must maintain an LCR of at least 100%.
Deposit protection
Even with strong regulation, banks can still fail. The Financial Services Compensation Scheme (FSCS) protects UK depositors up to £85,000 per person per institution. If a bank fails, the FSCS pays out within 7 working days. This means most retail savers should not lose money even if their bank goes bust — but it also means spreading large deposits across multiple institutions is sensible for amounts exceeding £85,000.
Bank regulation is like requiring all buildings to meet minimum safety standards — you need it most precisely when conditions make it seem least necessary, because that is when corners get cut.
What changed after 2008
Before 2008, the major banks operated with far less capital — some had effective leverage ratios of 30:1 or more, meaning £1 of capital supporting £30 of assets. When those assets lost value, capital was wiped out almost instantly. Post-2008 reforms dramatically increased capital and liquidity requirements and introduced stress testing — annual exercises where the Bank of England models what would happen to each major bank in scenarios like a sharp recession, a housing crash, or a severe market dislocation. Banks that fail the stress test must raise more capital before resuming dividends or buybacks.