Andrew Bailey, the Governor of the Bank of England, found himself defending a controversial decision this week as he announced the first reduction in bank capital rules since the 2008 crash. Facing questions about whether the regulator was becoming complacent, Bailey termed the move a “sensible reflection” of reality. He argued that the overly cautious approach of the past decade could now be safely adjusted to help the economy.
The central bank plans to reduce the capital requirement ratio to about 13%. This technical change reduces the financial buffer banks must maintain. Bailey was keen to preempt criticism, stating, “I understand fully that the financial crisis is disappearing into the rear view mirror… but we do have to continue to maintain the lessons of the financial crisis.”
The pressure to make this move has been mounting from the government. With the UK economy in need of a kickstart, political leaders have been eyeing the billions of pounds sitting in bank reserves. Chancellor Rachel Reeves recently wrote to Bailey welcoming the review, pushing for a balance that delivers “resilience, growth and competitiveness.” The Governor’s announcement effectively delivers on this request.
However, Bailey also used the platform to highlight where the new dangers lie. He pointed to the private credit sector and the rapid debt accumulation by AI companies as the modern equivalents of the risks that caused the 2008 crash. He noted that the failure of US auto firms linked to private credit had “worrying echoes” of the past, suggesting that while banks are safer, the financial system as a whole still has vulnerabilities.
Ultimately, Bailey’s strategy relies on a “two-way relationship” between banks and the economy. He argued that if banks use this regulatory break to lend more, the economy strengthens, which in turn helps the banks perform better. It is a calculated bet that the major lenders will act responsibly with their increased liquidity.