The Bank of England has proposed significant changes to regulations for lenders, marking the most significant relaxation since the 2008 financial crisis. The proposal aims to reduce the mandatory reserves that banks must hold as a precaution against potential collapse. This move is expected to encourage banks to increase lending to both individuals and businesses in an effort to stimulate economic growth.
Simultaneously, the Bank of England has issued warnings regarding a possible sharp decline in the value of predominantly US-based tech companies, citing concerns about an artificial intelligence bubble. Additionally, the Bank highlighted that UK stock prices are currently at their highest levels since the global financial crisis of 2008. Despite growing stock market concerns, Bank Governor Andrew Bailey defended the decision to ease capital requirements, emphasizing the resilience of the banking system in the face of recent economic turmoil.
Addressing concerns about a potential repeat of past financial crises, Bailey assured that the Bank’s actions are prudent and necessary. He emphasized that the intention is not to dictate how banks utilize the freed-up capital but stressed the importance of banks supporting the economy through increased lending, which would benefit both the economy and the banks themselves.
Under the proposed changes, banks would see a reduction in their capital requirements from around 14% to 13% of their risk-weighted assets, allowing them to allocate less capital as a safeguard against risky ventures. The regulations were initially introduced post-2008 crisis to curb excessive risk-taking in the banking sector and shield against potential failures.
Recent reviews indicate that UK banks currently carry lower risks on their balance sheets compared to early 2016, according to the Financial Policy Committee. The Committee expressed confidence in the resilience of the UK banking system, stating it can support households and businesses even in adverse economic conditions.
Investment director Russ Mould praised the UK banking sector for passing the Bank of England’s stress test, attributing the sector’s strength to lessons learned from the 2008 financial crisis. Mould highlighted the industry’s enhanced resilience and its ability to withstand severe economic downturns, ensuring ongoing support to consumers and businesses.
Despite acknowledging increased threats to financial stability, the Bank’s Financial Policy Committee noted that UK household and corporate debt levels remain manageable. The stress test results have instilled confidence in the Bank of England to revise downward the required capital banks must hold, potentially paving the way for increased lending to fuel economic expansion.