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 decrease the reserves banks are required to hold to safeguard against collapse, with the expectation that this move will lead to increased lending to individuals and businesses, consequently stimulating economic growth.
However, amidst concerns of a potential bubble in artificial intelligence and a possible sharp decline in the value of major US tech firms, the Bank of England also expressed apprehension about the current highly stretched UK share prices. Despite the growing unease in the stock market, Bank Governor Andrew Bailey defended the decision to ease capital rules, emphasizing the resilience of the banking system in the face of past economic shocks.
During a press conference, Mr. Bailey reassured the public that the Bank is acting prudently and not overlooking the lessons from past financial crises. He clarified that the Bank is not anticipating any adverse effects on the regulatory framework due to the proposed changes. Addressing concerns over how banks might utilize the freed-up capital, Bailey stressed the importance of banks supporting the economy through increased lending to strengthen both the economy and their own returns.
Under the new proposal, banks will see a reduction in their capital requirements from approximately 14% to 13% of their risk-weighted assets. These requirements serve as a protective measure to shield banks from risky lending practices and potential losses, a precaution introduced post the 2008 financial downturn.
A recent review by the Financial Policy Committee indicated that UK banks currently have lower risk exposure on their balance sheets compared to early 2016. The Committee affirmed that the UK banking system’s resilience enables it to sustain households and businesses even under severe economic conditions.
Notably, the stress test results have been positive, indicating that major UK banks are well-prepared to handle a significant economic downturn and continue providing essential support to consumers and businesses. While acknowledging increased threats to financial stability, the Bank’s Financial Policy Committee remains confident in the UK’s minimal levels of household and corporate indebtedness. The revised capital requirements are expected to be welcomed by the government, aligning with its objective to promote increased lending for driving economic expansion.