The Financial Policy Committee decided to cut its estimate of how much capital British banks need to around 13% of risk-weighted assets, down from 14% previously, with Governor Andrew Bailey saying the move was the "sensible thing to do".
The Bank of England's relaxation of capital requirements will lift shareholder payouts but do little to boost the wider economy, according to two of the central bank's former senior officials.
David Aikman and John Vickers -- who helped draw up Britain's post-financial crisis rules -- warned that the easing of regulations comes against a backdrop of growing financial risks.
"The most likely practical effect of this weakening of resilience will be higher payouts to bank shareholders, rather than increased lending to the real economy," they said in an article for the Centre for Economic Policy Research. "We see no compelling economic reason for the Financial Policy Committee's loosening of bank capital policy."
Last month the BOE's Financial Policy Committee decided to cut its estimate of how much capital British banks need for the first time in a decade, against a backdrop of a global deregulation sparked by Donald Trump's White House.
Policymakers said the UK banking system should have Tier 1 capital equal to around 13% of risk-weighted assets, down from 14% previously. The committee also announced plans to consult on other enhancements to its capital framework this year.
Governor Andrew Bailey said the move was the "sensible thing to do" and a "reflection of conditions of the health of the banking system." The Labour government has pressed regulators to boost growth and the BoE must also satisfy a new secondary mandate to help the competitveness of the domestic industry.
However, Aikman and Vickers said that economic and financial risks have "clearly increased" since the last major review on capital requirements.
"Higher macro-financial risk and sharply reduced fiscal capacity point to a need for higher rather than lower bank capital requirements," they said. "Indeed, using the Bank's own analytical framework, we explain why we believe that the FPC has got it wrong."
They cited the BOE's own analysis, which says the "updated benchmark is within, albeit towards the lower end of, the range of capital requirements that are likely to maximise expected long-term growth."
"It is unclear why a financial stability regulator should choose the lower, and hence riskier, end of its own range," the duo added.
In the run-up to December's FPC decision, banking lobby group UK Finance said the UK's capital requirements "have become misaligned with international peers pursuing the same stability goals, resulting in the highest headline requirements across the G7."
Aikman, a former BOE economist who specialized in financial stability, is now a director at the National Institute of Economic and Social Research.