The Bank of England has proposed significant changes to regulations on lenders, marking the most significant relaxation since the 2008 financial crisis. The proposal aims to lower the reserves banks are required to hold to safeguard against potential collapse. This move is expected to encourage increased lending to individuals and businesses, ultimately stimulating economic growth.
However, the Bank of England also issued warnings regarding a potential sharp decline in the value of predominantly US tech companies, signaling concerns about a possible artificial intelligence bubble. Additionally, the Bank cautioned that UK share prices are currently at their most elevated levels since the global financial crisis of 2008. Despite mounting concerns in the stock market, Bank Governor Andrew Bailey defended the decision to ease capital requirements.
During a press conference, Mr. Bailey emphasized the resilience of the banking system in the face of significant economic shocks in recent years. He stated that the decision to reduce capital rules was sensible and reasonable, dismissing fears of triggering another financial crisis or failing to learn from past mistakes.
Mr. Bailey clarified that the Bank does not dictate how banks utilize the freed-up capital, highlighting the importance of banks supporting the economy through increased lending. The proposed changes would lower the capital requirements for banks from around 14% to 13% of their risk-weighted assets.
These rules were initially introduced post-2008 financial crisis to mitigate risky lending practices and protect against financial instability. The Financial Policy Committee (FPC) found that UK banks currently carry lower risk on their balance sheets compared to early 2016, indicating the resilience of the banking system.
Investment director Russ Mould praised the UK banking sector’s performance in the stress test conducted by the Bank of England. He noted that lessons from the 2008 financial crisis have led to stronger banks capable of withstanding economic downturns and providing continued support to consumers and businesses.
While acknowledging increased threats to financial stability, the FPC highlighted the UK’s low levels of household and corporate indebtedness. The stress test results have instilled confidence in the Bank of England to reduce the required capital for banks, aligning with the government’s objective to promote lending for economic growth.