What's happened
The Bank of England has lowered its system-wide capital requirements by 1 percentage point, citing improved risk measurement and reduced systemic importance of banks. Experts warn this could lead to higher payouts to shareholders, while some officials emphasize the need for financial stability.
What's behind the headline?
The decision to cut bank capital requirements by the Bank of England signals a shift towards prioritizing growth over resilience. While officials like Governor Bailey argue that the UK’s resolution regime justifies lower buffers, critics such as Vickers and Aikman contend that this move risks increasing bank payouts at the expense of stability. The divergence highlights a fundamental debate: should regulators favor economic growth through lighter regulation or maintain higher buffers to prevent future crises? The current stance suggests a belief that the financial system's improved risk measurement and reduced systemic importance justify the easing, but this could backfire if systemic risks re-emerge. The move aligns with political pressures to reduce regulation, yet experts warn it may weaken the sector’s resilience, especially amid global uncertainties. The next few years will reveal whether this balance tips towards growth or stability, with potential consequences for taxpayers and the economy.
What the papers say
The articles from Reuters and Politico reveal contrasting perspectives on the Bank of England’s recent easing of capital requirements. Reuters highlights that Governor Bailey defends the move, citing updated assessments and the UK’s resolution regime, while critics like Vickers and Aikman argue that the reduction risks undermining financial stability and increasing shareholder payouts. Politico notes Nigel Farage’s comments on potential reforms, including appointing a Brexiteer as Bank of England governor and scrapping the Office for Budget Responsibility, reflecting broader political debates about independence and economic policy. The divergence underscores a tension between regulatory prudence and political-economic ambitions, with some experts warning that relaxing capital buffers could have long-term repercussions for financial stability.
How we got here
Following the global financial crisis, the Bank of England implemented higher capital requirements to bolster bank resilience. Recent changes reflect assessments that UK banks are less systemically important and benefit from improved risk management, prompting a reduction in capital buffers. Critics argue this risks undermining financial stability.
Go deeper
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Rachel Jane Reeves is a British Labour Party politician serving as Shadow Chancellor of the Duchy of Lancaster and Shadow Minister for the Cabinet Office since 2020. She has been the Member of Parliament for Leeds West since 2010.
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Sir John Vickers is a British economist and the Warden of All Souls College, Oxford.
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Andrew Bailey may refer to:
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The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based.