Top UK Regulator Says Banks Are Trimming AI Risk as Alarm Grows

UK banks have begun trimming exposure to artificial intelligence as alarm mounts about a brutal correction in the sector, according to the Bank of England’s top supervisor.

In her first interview since taking over the Prudential Regulation Authority in July, Katharine Braddick said the BOE’s extensive interrogation of banks’ AI exposure hasn’t shown that lenders would be an “amplifier” of any AI shock. Still, the central bank isn’t being complacent.

“We’re all alarmed at the moment, aren’t we?” she said, though the BOE is not currently planning to use capital rules to encourage lower exposures. Banks are “all asking themselves that question” of whether to reduce exposure, she said of a retrenchment she’s seen recently. “I can see firms looking at their risk appetite and thinking and considering, ‘Yes this client, not that client.’ You do see it feed through.”

A potential AI implosion has been just one of the many things keeping Braddick on her toes since she became the first outsider to take over the 13-year-old PRA, a cornerstone of Britain’s post-financial crisis infrastructure. Braddick joined the authority a few months after Anthropic PBC’s Mythos model spooked watchdogs and governments across the world, forcing them to contemplate unprecedented cyberattacks perpetrated by agentic AI.

More recently, the US midterm elections drove a sell off in AI-related stocks, causing a rout that’s already imperiled Anthropic’s much-anticipated public offering.

Braddick, a Cambridge University graduate who spent almost two decades in policy before a three-year stint at Barclays Plc, says AI risks are “constant conversation.” Broader issues around operational resilience have also been of paramount concern in her conversations with bank chief executive officers so far.

The PRA and Financial Conduct Authority will publish guidance later this month on how to deal with risks from frontier AI and quantum computing. Braddick said the approach would be “quite concrete,” including laying out governance expectations, and hopes it will kick off an “iterative exercise” that will lead to deeper partnerships between the BOE and the industry.

Braddick is also looking at how to operationalize the “minimum viable bank” framework proposed by BOE Governor Andrew Bailey earlier this year, a concept that would require banks to have “bare metal” functions capable of delivering continuous service in case of a cyber-attack.

“It’s an urgent question,” Braddick said of deliberations on which banks should be required to have their own infrastructure, as well as how to create a structure for smaller lenders who can’t afford their own rails. No deadlines have been set for introducing such rules.

This kind of resilience-focused work is “one of the most important things we can do for the UK’s competitiveness,” Braddick, a deputy governor of the BOE, said. “Operational resilience doesn’t deliver financial resilience. But the two are out of kilter, so we need to uplift operational resilience.”

Case for Stability

Still, capital requirements have taken center stage in the public debate on competitiveness, with banks leading demands for reprieves. Chancellor of the Exchequer John Healey recently wrote to Governor Bailey urging the BOE to implement agreed reforms “as quickly as possible” and deliver “further proposals” to keep the UK competitive.

Braddick called Healey’s letter “completely understandable,” though it hadn’t changed her thinking on the PRA’s approach to capital.

The regulator sits on the Financial Policy Committee, set to later this week discuss a package of capital reforms in the works, following last year’s decision to reduce the UK’s benchmark capital requirements by 1 percentage point to 13%. The outcome of the deliberations will be announced on Nov. 26.

“I don’t have a defensive position on capital, but it is the keystone of everything that we do about financial resilience,” she said. She declined to go into specifics, such as on lowering the countercyclical buffer’s neutral level — the additional capital banks are required to hold in normal economic conditions — to below 2% or concentration risk charges.

She said she doesn’t expect “further proposals” by Healey to lead to another grand package of reforms, instead arguing the case for stability and predictability after recent change.

That philosophy is helping drive the PRA’s first five-year strategy she’s promised to deliver early next year. Braddick said her officials would “soon” begin testing some of its ideas on firms, particularly around how the authority should be held accountable for growth and competitiveness.

The PRA has also promised more transparency, which Braddick said was partly informed by her time at Barclays when she realized how much of a mystery regulators can be from the outside. Banks have been pushing in particular for more transparency on a key capital buffer for so-called other systemic institutions, something that has long been a black box.

“I recognize the general observation, which is that there are bits of our regime that are opaque to firms, where it’s useful for us to ask whether that opacity is necessary or even intended,” she said, adding that she was “open to that conversation.”

Another conversation Braddick seems open to is with Swiss bank UBS Group AG, which has signaled it’s open to moving its headquarters if Switzerland pushes ahead with a new capital regime.

Braddick said she hasn’t spoken to “a large Swiss bank about where it might want to headquarter” but she has heard from two different firms in recent weeks that have asked about relocating to the UK.

“What UBS want to do is up to UBS,” she said. “We don’t chase business, but where firms are interested in what it means to locate in the UK, whether it works for them, we would always want to talk to them.”

Photo: Katharine Braddick Photographer: Betty Laura Zapata/Bloomberg