The central bank said credit conditions in Britain had largely recovered from the financial crisis, and warned asset prices were vulnerable to a big rise in interest rates and emerging market risks, meaning banks needed an extra buffer.
"With today's announcement, the basic amount of capital our system requires is settled," said Bank of England (BoE) Governor Mark Carney, setting out plans for top UK banks including HSBC (>> HSBC Holdings plc), Lloyds (>> Lloyds Banking Group PLC), Barclays <BARC.L and RBS (>> Royal Bank of Scotland Group plc).
"By moving early, before risks are elevated, the FPC (Financial Policy Committee) expects to be able to vary the countercyclical capital buffer gradually," he added, referring to further changes the BoE may make to capital requirements at different stages of the economic cycle.
Carney said the central bank didn't want to force banks to hold excessive amounts of capital. "While the benefits of increased resilience are clear, higher capital costs are ultimately passed on to borrowers," he said.
The BoE also released the results of annual 'stress tests' into how Britain's big seven lenders would deal with unexpected economic shocks.
This year the focus was on emerging market and trading risks, and Royal Bank of Scotland (RBS) and Standard Chartered (>> Standard Chartered PLC) both only passed thanks to steps they took to improve their capital ratios during the process, which lifted their leverage ratios above the minimum 3 percent level.
The other five big lenders tested - HSBC, Barclays, Lloyds Banking Group, Santander (>> Banco Santander, S.A.) and Nationwide - did not have to take action.
“RBS was always still further behind in the journey but Lloyds and Barclays are fine, with no material threats of further capital raising or, in Lloyds case, growing dividends over time,” Richard Buxton, CEO of Old Mutual Global Investors, a shareholder in RBS, Barclays & Lloyds, told Reuters.
Shares in Lloyds were up 2.8 percent in early trading, with RBS, Barclays and Standard Chartered up about 2.2 percent and HSBC up 1.3 percent.
The BoE said it expected banks to hold a so-called counter-cyclical capital buffer (CCB) of 1 percent during normal times, and was in the process of tweaking bank-specific requirements with a view to imposing this step-by-step from March.
The CCB aims to rein in risky lending at frothier stages of the credit cycle. It stands at zero currently, but the BoE has already required some banks to hold extra capital due to firm-specific risks. Some economists and banking analysts had expected the BoE to raise the CCB this month to 0.5 percent.
The BoE also said it expected the banking sector as a whole to hold high-grade tier one equity capital of 13.5 percent of risk-weighted assets by 2019, up from 13 percent now - part of which would overlap with the capital required for the CCB.
The BoE has said it wanted to give banks more clarity about its long-run aims for the amount of capital they hold. Banks have complained that in the past, the BoE has unexpectedly piled on extra capital requirements, making it hard for them to lend or decide which lines of business to stay in.
HIGHER RATE RISK
The BoE Financial Policy Committee's report comes as markets brace for the United States to raise interest rates later this month for the first time since the financial crisis.
"Financial market prices remain vulnerable to a sharp increase in market interest rates or the compensation demanded by investors for risky assets," the report said.
With the BoE's Monetary Policy Committee unlikely to raise British interest rates until later next year, the FPC is having to take other steps to guard against risky behaviour.
Even if domestic cost pressures are too weak to warrant a rate rise, British consumer and mortgage lending is growing at its fastest rate since the financial crisis.
So-called buy-to-let mortgages - which enable small landlords to purchase property to rent out - showed weaker underwriting standards than residential mortgages and the BoE's Prudential Regulation Authority said it was examining this.
The FPC said it stood ready to take action if needed and would monitor closely the impact of higher property transaction taxes for buy-to-let purchases which finance minister George Osborne announced last week and will take effect next April.
The BoE also said a recent narrowing in Britain's big current account deficit was likely to be temporary.
(Additional reporting by Steve Slater, Sinead Cruise and Simon Jessop; Editing by Mark Potter)
By Huw Jones and David Milliken