Financials Unshackled | Perspectives of 8th Dec 2025 (UK Banks Capital Framework, HSBA Chair, PAG Reflections, PTSB Sale Process Thoughts)
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Welcome to the latest Financials Unshackled edition. This is a short ‘Perspectives’ note on a few key recent developments. Let me know if you have any feedback and I’ll return to your inboxes on Sunday 14th December with a Weekly Briefing note.
🇬🇧 UK Banks: BoE FPC judges that lower capital requirements are appropriate
What Happened In Brief?
The Bank of England (BoE) published its Financial Stability Report (FSR) last week here (with more downloads available here - and the press conference opening remarks transcript here and Q&A transcript here) together with: i) a Record of the Financial Policy Committee (FPC) meetings on 25th November and 1st December 2025 here and ii) a document setting out the FPC’s assessment of bank capital requirements here. In short, despite the fact that the FPC notes that risks to financial stability have increased in 2025, the Committee judges that “The UK banking system is well capitalised, maintains robust liquidity and funding positions, and asset quality remains strong” and that “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”. Zoning in on bank capital requirements specifically, the FPC now judges that the appropriate benchmark level for system-wide Tier 1 capital requirements is one percentage point lower than its previous judgment - falling to c.13% of RWAs, which is equivalent to a CET1 capital ratio of c.11%.
Unshackled Reflections on bank capital requirements
Overall Take: Helpful to see the FPC revise down the appropriate benchmark for the system-wide level of Tier 1 capital requirements to c.13% of RWAs. But it’s no sea change. It’s c.13.5% today (not c.14%) as the PRA CEO Sam Woods noted in the Q&A at the press conference and the FPC has now quantified the expected reduction in Pillar 2 (owing to adjustments made to risk measurement in Pillar 1) at the stage of implementation of Basel 3.1 on 1st January 2027, i.e., 50bps. This 50bps reduction in Pillar 2 will reduce today’s minimum requirement to c.13%.
Stepping back: The supervisory regime, as one would expect, strongly defends its determinations - including its decision to preserve the CCyB at 2.0%. Yet the door has been left open to further change in time. Some may see this as an overarching push from the top of the BoE to effect change on a graduated basis, which, if so, would seem sensible at one level - indeed the refresh at the top of the PRA expected next year may also exert influence in the future.
Buffers the likely focus going forward; not the Tier 1 capital requirement: In particular, it is worth noting that the FPC has committed to “working with the PRA and international authorities to enhance further the usability of regulatory buffers, and so reduce banks’ incentives to have capital in excess of regulatory requirements and buffers”. Indeed, the FPC appears resistant to further downward reductions below 13% with the report observing: “Analysis also suggested that reducing structural capital requirements materially below the FPC’s updated benchmark of 13% (unless due to further improvements in risk measurement that allow overlaps to be removed from Pillar 2A requirements) could be associated with significant reductions in long-run expected GDP through the costs of greater instability, especially if those reductions in capital were to undermine the credibility of the resolution regime as a result of lower overall loss-absorbing capacity. Materially lower capital levels could also lead to higher risk premia on bank funding costs, which would in turn feed through to higher borrowing costs and lower investment by businesses.”. However, the BoE remains pragmatic in its thinking with the Governor noting at the press conference (in response to a question): “If we see very, very big deregulatory moves, well, I mean, there’s going to be some pretty frank conversations going on to start with. And that will be the starting point.”.
Buffer usability considerations: There was considerable focus in the report on how the PRA and FPC have no requirements - formal or informal - for management buffers above minimum CET1 requirements, i.e., economic buffers as distinct from regulatory buffers. The FPC report observes that, at end-2024, banks’ CET1 headroom over the higher of risk-based and leverage ratio requirements was c.2.1% of RWAs (c.£37bn) in aggregate and has also been stable in recent years, with some variation across banks that partly can be attributed to their business models. The PRA and the FPC observe that, in aggregate, banks maintain this incremental capital for a number of reasons, including a perceived lack of regulatory capital buffer usability. To reiterate (and to elaborate), the report notes that: “Working with the PRA and international authorities, the FPC would work to enhance further the usability of regulatory buffers and so reduce banks’ incentives to have capital in excess of regulatory requirements and buffers [see more below on this point]. Regulatory capital buffers made up just under half of risk-weighted capital requirements. These buffers were explicitly intended to be usable to help banks absorb losses in stress while maintaining the provision of services to the real economy in a downturn – by reducing incentives for banks to deleverage in order to defend their capital position. Experience and a range of research suggested, however, that banks were reluctant in practice to use their buffers, which might have contributed to the size of banks’ management buffers above leverage ratio requirements.”. Indeed, for more of the FPC’s and PRA’s thinking on this, it is worth considering these excerpts from the report: “There are various reasons why banks choose to have such headroom, including investor and rating agency expectations, business models and strategic plans, regulatory requirements set by overseas regulators, and the need to manage capital volatility. But to the extent that incentives to maintain excess capital can be reduced by enhancing buffer usability, this could allow banks to support a material increase in lending…further consideration could be given to the ideas introduced in Sam Woods’ ‘Bufferati’ speech, which sets out a vision for a simpler capital framework, including moving to a single releasable buffer, and replacing automatic distribution restrictions with a ladder of intervention tools operated with supervisory judgment..”. Sam Woods’ ‘Bufferati’ speech from 26th April 2022 can be accessed here.
CCyB considerations: As noted earlier, there had been a level of expectation (though not necessarily widespread expectation) that the CCyB could have come in for a restructuring within the Capital Framework Review - which emerged following remarks made by Sarah Breeden, Deputy Governor for Financial Stability at the BoE, at a conference in Spain on Tuesday 4th November in which she touched on management buffers and the usability of regulatory capital buffers - noting that lenders should feel able to draw down on their capital stack without fear of a supervisory response, such as a dividend blocker as well as noting: “How can we think about changing the approach to the buffers that the banks have got? It’s not just simplifying. It’s changing the structure so that it can properly be used.” (as reported by Bloomberg here). The particular issue with the CCyB is that, although there is national discretion in terms of how it is implemented, it is part of the combined buffer requirement that sits above the CET1 MDA trigger - and this serves to exert pressure on bank management teams to hold large management buffers to maintain an appropriate distance from MDA to avoid onerously high AT1 coupon costs et al.
Further changes to come in time in my view: It is not inconceivable that the CCyB could come in for a restructuring in the future in my view as this could be a potential solution in the context of management buffer levels - without necessarily seeing a further reduction in the Tier 1 capital requirement, i.e., while the CCyB is (and has proven to be) releasable, its interplay with MDA is a specific issue. Indeed, Phil Evans (Director, Prudential Policy at the PRA) remarked in his speech on Basel 3.1 last week here that the Capital Framework Review “…has, and will continue given the next steps, to occupy a lot of bandwidth in the PRA as we look to do the best evidence-based job we can in order to do it justice”.
🇬🇧 HSBC Chair Succession
What Happened In Brief?
HSBC (HSBA) announced on Wednesday 3rd December here the appointment of INED Brendan Nelson as Group Chair - succeeding Mark Tucker with immediate effect following “a robust process that considered both external and internal candidates”. Nelson had been serving as Interim Group Chair since Mark Tucker’s departure on 30th September.
Unshackled Perspectives
I have penned a detailed piece on this development (please email me at johncronin@seapointinsights.com if you want me to send it to you) and here are a few select extracts with my key conclusions:
Given the importance of the role and the obvious challenges in securing a suitable candidate for it (deep international banking leadership experience in UK, Asia and beyond; the gravitas and diplomacy to navigate the tensions between China and the US; the full-time associated commitment and legal risks et al.) it seems to me that more could have been done sooner to be prepared for Tucker’s impending departure - and there was always the risk that he could jump ship earlier given his age (relatively young in the context) and relentless energy levels, especially following the announced appointment of Elhedery as Group CEO (with effect from 2nd September 2024) on 17th July 2024.
I think it’s fair to conclude that Nelson’s promotion denotes stability and strategy continuity. Indeed, following a long period with a hard-charging Chair (reminiscent of the style of HSBA’s Executive Chairs in past times) at the top (who was quick to dispose of CEOs who he didn’t see as the right fit), maybe this stability and calmness is what HSBA’s investors and wider stakeholders need right now.
The appointment should leave some more space for the CEO and wider executive team to execute on the strategy - with Nelson orchestrating challenge at appropriate junctures rather than, perhaps, breathing down the neck of the CEO on an ongoing basis (and it is not evident that this has been Tucker’s style anyway since Elhedery’s elevation). That doesn’t mean absence of appropriate debate and challenge. And adopting a different style doesn’t mean Nelson will be any less effective in the role.
The risk is that, given Nelson’s preference for a shorter tenure than his predecessor, we could be facing another Chair contest not before long. However, I think the Board is likely to have learned some lessons from leaving things too late and presumably has a strong preference for a period of stability now. So, my view is that the ‘base case plan’ at Board level, all going well, is for Nelson to serve a minimum term of about three years - enough time to avoid any instability ahead of the next round of refreshed medium-term targets in the Spring of 2028.
🇬🇧 Paragon Banking Group sees share price dip in response to results
What Happened In Brief?
Paragon Banking Group (PAG) published full year results for the year to 30th September 2025 (FY25) last week and the share price fell in the region of c.5% in response to the update.
Unshackled Perspectives
I studied the results, joined the earnings call, and had a call with the CFO and here are a few key observations as I see it:
Results were strong (NIM 313bps which was consistent with the 1H25 outturn; CIR 34.8% down from 35.2% in 1H25, u/l RoTE 17.5% vs. 17.8% for 1H25; DPS +8.7% y/y and fresh £50m buyback; CET1 ratio 13.6%). It appears that the market was focused on two negatives: i) FY26 NIM guidance for 290-300bps; and ii) to a lesser extent, the inflation in CoR (26bps in FY25, up from 19bps for 1H25).
On NIM, my experience is that management has a habit of somewhat cautiously guiding. Initial guidance for FY25 NIM was c.300bps so it’s essentially a 5bps y/y reduction in guided NIM if you take the midpoint of the guided range. Moreover, FY24 NIM came in at 316bps so the delta between prior year actual and forward year guidance has essentially moved by 2bps (from 16bps to 18bps). This shouldn’t have been much of a surprise in my view but maybe investors have been primed, given management’s track record, to expect upgrades. I would further add that investors could have paid more attention to company-compiled consensus here - which was already at 3.00% for FY26 prior to the results. That said, the continuing challenges in a deposit pricing context particularly may have surprised some.
Sticking with NIM, and stepping back, it strikes me that the downward guided trajectory is an adjustment process that will settle when base rates settle - i.e., more reliance on expensive variable rate deposits during the transition (with scope to increase the proportional reliance on wholesale funding with that said - especially given easy access deposit market behaviour) and a return to a more traditional funding structure when rates stabilise.
On the cost of risk, PAG notes that 82% of the FY25 26bps charge related to the development finance portfolio, where a cohort of loans written just prior to the inflationary and interest rate peak in 2022 continued to generate impairment requirements. The rest of the loan book saw only modest provisioning requirements, which were stable y/y at a CoR of just 5bps. PAG is guiding to u/l RoTE for FY25 in the middle of the 15-20% range (despite the guided NIM shrinkage) which indicates to me that the issue with the affected development finance portfolio loans is not expected to escalate.
Finally, on IRB accreditation ambitions, PA notes that it continues “…to press ahead with our IRB application for buy-to-let. In addition, preparatory work for our development finance portfolio is also well underway as the next stage in our roll-out plan. We have submitted an updated set of models and associated modules to the PRA following their feedback on previous submissions and we continue to have close contact with them as part of advancing our application process.”. This has been a long burn. The PRA continues to be extremely busy working with larger institutions’ hybrid models. We will have to see what comes. However, in the meantime it is worth noting that a potential future avenue open to PAG (and other banks with standardised portfolio) is to eke out some capital relief / optimisation through SRTs. I recently wrote about the following two changes enshrined in PS19/25 in this vein:
How the authorisation of unfunded protection in the context of SRTs from 1st January 2026 opens the UK market to insurers and re-insurers to provide credit risk mitigation which should result in a lower cost of capital for banks.
A new formula is set to be introduced on securitisations for standardised portfolios with effect from 1st January 2027 - which will serve to improve the economics of SRTs in the case of most loan assets. In technical terms, the junior securitisation tranches for those asset classes placed to achieve a SRT will not have to be as thick as is the case under current UK regulations - and, by having to place a smaller portion of the capital stack to achieve a SRT, the economic benefits will therefore be greater (in the past the cost was effectively inhibitive for standardised portfolio SRTs).
While investors will likely wish to see evidenced delivery here, this is something to be thinking about ahead of time in my view given the prospective capital relief available to banks like PAG.
🇮🇪 PTSB formal sale process continues to command attention
What Happened In Brief?
Just a couple of things worth flagging on PTSB: i) an article in the Sunday Independent yesterday here noting that no “big European bank” has yet emerged as a potential bidder for PTSB (the headline notes “no bidders emerge for PTSB”, which I personally found confusing) and that trade unions have reiterated their opposition to any financial buyer (a report had surfaced in The Irish Times on this on the evening of Friday 31st October here - shortly after I published a detailed thought piece on the PTSB sale process here); and ii) news on Friday that PTSB has negotiated a significant 4% pay agreement for its staff for 2026 with trade unions as well as an agreement amongst all parties to engage on a variable pay scheme during 2026.
Unshackled Perspectives
I was quoted extensively in the Sunday Independent piece. However, I wish to make it clear that I categorically did not state to the reporter (or anyone else for that matter) that no big European bank has emerged as a potential bidder. I gave my views to the reporter and, for clarity, here are my key perspectives and ‘trail of thought’ on the process:
When I read this article in The Sunday Times on 18th October my gut reaction was that this may have had its origins in an attempt to see if Bankinter would say something - with the article coming just before Bankinter’s 3Q25 earnings call. And, based on my view, it said to me that Bankinter’s interest (or lack thereof as the case may be) was not established at that point. Lo and behold the question came up on the Bankinter 3Q earnings call and CEO Gloria Ortiz noted that “…with respect to inorganic growth, well, our appetite is very, very low. As you can imagine, we are an organic grower. We have always grown organically in the different businesses and geographies where we have the capabilities, and this is what we are doing in Ireland, and this is what we will continue to do in the future.”. I went on to note in Financials Unshackled Issue 67 on 31st of October: “While this pours cold water on the media speculation, like any CEO Ortiz is careful enough in her language not to rule anything out definitively. Indeed, I suspect Bankinter will participate in the process and may have an interest in accelerating its growth in the Irish market - and defensive considerations in respect of its ambitions here might be a factor in Bankinter’s thinking too.”. Right now - consistent with what I relayed in Financials Unshackled Issue 67 - my suspicion is that Bankinter will take a look but I don’t think there is a high probability they will transact.
I also noted in Financials Unshackled Issue 67 that “…it seems unlikely that the Board is not aware of any interest before formally announcing a sale process. Putting a company into play can have destabilising effects for employees and other stakeholders and it would seem reckless to do this in a non-emergency situation if there is not a known level of interest.”. So, given Bankinter’s stated lack of appetite (as noted above), I felt that if there is known interest from a third party bank it most likely relates to BAWAG given its existing presence in Ireland and its efficient operating model. However, it could be any bank anywhere.
I made the point in Financials Unshackled Issue 67 that “I expect that Goldman Sachs’, PTSB’s retained advisers, will sound out several potential Continental European acquirers - including the likes of Unicredit, Santander, BNP Paribas, et al. Many banks are acquisitive. What is unclear is whether they would be tempted to break into Ireland.” and that “On balance, I suspect there will be a healthy level of interest in participating in a process.”. To be clear my view remains that I would ascribe a very low probability to any large cross-border behemoth making a formal bid for PTSB - both the bank and the country it operates in are likely to be far too small for these majors in my view. Regardless, there are hundreds of banks in Europe and as I wrote in Financials Unshackled Issue 67 I expect that the net will be cast far and wide here. For what it’s worth I don’t expect non-European banks to participate but, again, that is just speculation.
Stepping back we are at the early stages of a process. It is not surprising for things to go quiet. And we won’t know more for a while. Sure, there will continue to be plenty of speculation and murmurs while this process continues - all of which should get treated with a big pinch of salt in my view (rather than overreacting to press articles) as agendas often rule the narrative in my experience. I would also add that I am highly doubtful as to whether there is any deep intel whatsoever underpinning the assertion in the article that no big European bank has yet emerged as a potential bidder - but then what does “emerged” mean, etc.? I am interpreting it as if no interest has been shown by a big European bank - but what is “big” and, more importantly, is that the right interpretation?
As I reflect further I do wonder how much certainty the State - and indeed the PTSB Board - might have had in relation to third party bank interest prior to launching the formal sale process. It’s entirely possible that the level of interest was genuinely unclear at the outset and that the State might ultimately have limited choice in terms of prospective buyers. Indeed, perceptions of what constitutes ‘interest’ can vary widely amongst stakeholders. Political timing and transitions may also have created additional pressure to move ahead. My base case view remains that there must have been a high degree of confidence (based on much more than conjecture) that at least one bank bidder would come to the altar but that’s all some food for thought nonetheless. Anyway, time will tell, and I’ll continue to update you with my views as the situation evolves.
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