The Bank of England has warned of heightened risks to the UK’s financial system but cut the amount of money that banks need to hold in reserve in case of shock.

The twice-yearly financial stability report highlights a series of pressures, from higher government borrowing costs to risks around lending to major tech firms and record stock market valuations – particularly in areas exposed to artificial intelligence (AI).

“Risks to financial stability have increased during 2025,” the Bank‘s financial policy committee (FPC) said.

“Global risks remain elevated and material uncertainty in the global macroeconomic outlook persists. Key sources of risk include geopolitical tensions, fragmentation of trade and financial markets, and pressures on sovereign debt markets.

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“Elevated geopolitical tensions increase the likelihood of cyberattacks and other operational disruptions.

“In the FPC’s judgement, many risky asset valuations remain materially stretched, particularly for technology companies focused on AI.

“Equity valuations in the US are close to the most stretched they have been since the dot-com bubble, and in the UK since the global financial crisis (GFC). This heightens the risk of a sharp correction.”

Its concern extended to the growing trend of tech firms using debt finance to fund investment.

The Bank, which joined the International Monetary Fund in warning over an AI-led bubble in October, delivered its verdict at a time when UK regulators are under pressure from the government to place a greater focus on supporting economic growth.

It is understood, for example, the UK’s ringfencing regime – that sees retail banking separated from more risky investment banking operations within major lenders – is the subject of a review between the Bank and government.

Efforts by the chancellor to grow the economy will be potentially helped by the Bank’s decision today to lower capital requirements – the reserves banks must hold to help them withstand shocks in the financial system such as the global crisis of 2008/9.

The sector’s main capital requirement was cut by the Bank from 14% to 13%.

Such a move was urged, not only by the government, but by businesses to bolster UK lending and competitiveness.

The relaxation of the buffer does not take effect until 2027.

It was announced alongside confirmation that the country’s biggest lenders – Barclays, HSBC, Lloyds, NatWest, Santander UK, Standard Chartered and Nationwide building society – had passed the Bank’s latest stress tests.

The shocks each was exposed to included a 5% contraction in UK economic output, a 28% drop in house prices and Bank rate at 8%.

Despite the growing risks identified by the FPC, the Bank said that each was strong enough to support households and businesses even in the event of such scenarios, given the healthy state of their reserves.

It is widely expected that the gradual reduction in Bank rate will continue next year, assuming the outlook for inflation remains on a downwards trajectory, helping wider borrowing costs – a source of record bank profitability – decline.

The Bank said that three million households were expected to see their mortgage payments decrease in the next three years but that 3.9 million were forecast to refinance onto higher rates.

As such, it projected a £64 (8%) rise in costs for a typical owner-occupier mortgage customer rolling off a fixed rate deal in the next two years.

Banking stocks, which have enjoyed strong gains this year, were up when the FTSE 100 opened for business despite wider market caution globally which is aligned with the risks spoken of in the financial stability report.

Matt Britzman, senior equity analyst at Hargreaves Lansdown, said: “UK banks are offering a dose of optimism this morning in what’s turning out to be a good couple of weeks for the major lenders.

“The UK’s seven biggest banks sailed through the latest stress test, reaffirming their resilience and earning a regulatory nod to ease capital buffers.

“Most banks already hold capital well above the minimum by choice, so any shift in strategy may take time – but in theory, it frees up extra capital for lending or capital returns.

“However they use the new freedom, this is another clear signal that the UK banking sector is in robust health. This was largely expected, but the confirmation should still be taken well, especially after dodging tax hikes in last week’s budget.”

Children as young as three are “being fed content and algorithms designed to hook adults” on social media, a former education minister has warned.

Lord John Nash said analysis by the Centre for Social Justice (CSJ) suggesting more than 800,000 UK children aged between three and five were already engaging with social media was “deeply alarming”.

The peer, who served as minister for the school system between 2013 and 2017, said that “children who haven’t yet learned to read [are] being fed content and algorithms designed to hook adults”, which, he said, “should concern us all”.

He called for “a major public health campaign so parents better understand the damage being done, and legislation that raises the age limit for social media to 16 whilst holding tech giants to account when they fail to keep children off their platforms”.

The CSJ reached the figure by applying the latest population data to previous research by Ofcom.

The internet and communications watchdog found that almost four in 10 parents of a three to five year-old reported that their child uses at least one social media app or site.

With roughly 2.2 million children in this age group as of 2024, the CSJ said this suggests there could be 814,000 users of social media between three and five years old, a rise of around 220,000 users from the year before.

Lord Nash is among those who have demanded the Children’s Wellbeing and Schools Bill ban under-16s from having access to social media, something that will become law in Australia next month.

From 10 December, social media platforms will have to take reasonable steps to prevent under-16s from having a social media account, in effect blocking them from platforms such as Meta’s Instagram, TikTok and Snap’s Snapchat.

Ministers hope it will protect children from harmful content and online predators.

But one teenager who is against the idea is suing the Australian government as, he says, the measure would make the internet more dangerous for young people, many of whom would ignore the ban.

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Noah Jones, 15, co-plaintiff in a High Court case said a better plan would be “cutting off the bad things about social media”, adding, “I most likely will get around the ban. I know a lot of my mates will”.

UK campaigners have called for stronger policies to stop students using phones in schools, which already have the power to ban phones.

The CSJ wants to see smartphones banned in all schools “to break the 24-hour cycle of phone use”, and said a public health campaign is needed “to highlight the harms of social media”.

Last week Health Secretary Wes Streeting said he worries “about the mind-numbing impact of doomscrolling on social media on young minds and our neurodevelopment”.

Sudan’s paramilitary Rapid Support Forces says it has captured Babanusa, a transport junction in the south of the country, just a month after the fall of Al Fashir to the same group.

The RSF said in a statement the seizure of the city in West Kordofan state came as it repelled “a surprise attack” by the Sudanese army in what it called “a clear violation of the humanitarian truce”.

The paramilitary group added it had “liberated” the city in the state, which has become the latest frontline in the war in Sudan.

It comes just over a month after the Sudanese Armed Forces (SAF) withdrew from military positions in the heart of Al Fashir, the capital of North Darfur, and the symbolic site was captured by the RSF with no resistance.

The RSF claimed at the time it had taken over the city and completed its military control of the Darfur region, where the administration of former US president Joe Biden has accused the group of committing genocide.

The war between the Sudanese army and the RSF – who were once allies – started in Khartoum in April 2023 but has spread across the country.

About 12 million people are believed to have been displaced and at least 40,000 killed in the civil war, according to the World Health Organization (WHO) – but aid groups say the true death toll could be far greater.

Tom Fletcher, the UN’s under-secretary-general for humanitarian affairs, recently told Sky’s The World With Yalda Hakim the situation was “horrifying”.

“It’s utterly grim right now – it’s the epicentre of suffering in the world,” he said of Sudan.

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The United States, the United Arab Emirates, Egypt and Saudi Arabia – known as the Quad – earlier in November proposed a plan for a three-month truce followed by peace talks.

The RSF responded by saying it had accepted the plan, but soon after attacked army territory with a barrage of drone strikes.