UK Banks Embrace Era of Deregulation, But Warnings of Future Instability Loom
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UK banks are experiencing the most favorable regulatory climate as the 2008 financial crisis, as authorities ease restrictions and the government seeks the sector’s contribution to economic growth. However, experts caution against complacency, citing emerging risks like artificial intelligence, crypto assets, and cyber threats.
A New Dialog with Regulators
bank executives enthusiastically welcomed the UK’s more business-pleasant approach, praising the increased openness and recognition of the financial services sector’s importance to the British economy. However, many also called for further deregulation. Charlie Nunn, chief executive of Lloyds Banking Group, noted, “I don’t think there has been an environment for financial services that has been as supportive and positive since the financial crisis. The narrative has changed substantially,but we are not there yet.”
The City of London,whose reputation was severely damaged by the 2008 bailouts,has undergone a substantial image rehabilitation. Chancellor Rachel Reeves recently spared banks from an increase in the sector levy as part of her budget, and the Bank of England (BoE) this week reduced its estimate of the capital lenders are required to hold. Conor Hillery, co-head of Europe, Middle East and Africa at JPMorgan Chase, said the BoE’s move to lower minimum capital levels – following successful stress tests – was “well received.” He added, “We had draconian rules post-crisis, understandably, particularly around capital and liquidity. Lots of people said they whent too far.”
Labor government Continues Deregulatory Trend
Surprisingly, the current Labour government has continued the trend of easing regulations on the financial services sector, building on initiatives begun under the previous conservative governance. Paul Thwaite, chief executive of NatWest, observed that regulators are moving away from the intense focus on risk prevention that characterized the post-2008 era. He highlighted how recent rule changes have spurred an increase in mortgage lending. “Over the course of the last decade society has looked to manage down risk or manage away risk,” Thwaite said, noting NatWest’s recent return to full private ownership after its crisis-era bailout.
A Novel Approach to AI Regulation
The Financial Conduct Authority (FCA) is adopting a distinctly different approach to regulating the rapid adoption of artificial intelligence (AI) within the financial sector. Rather than imposing new rules, the FCA, led by chief executive Nikhil Rathi, will prioritize encouraging innovation and accepting that “there will be bumps in the road.” Rathi emphasized the need for a new relationship between regulator and regulated, stating, “We are not going to come after you for everything that goes wrong – what we will be concerned about is egregious failures that are not dealt with.”
Thwaite indicated that further easing of regulations is still possible, stating, “I’d say we’re closer to the start line than the finish line.”
Warnings of Complacency and Future Risks
Despite the positive sentiment, concerns remain about the potential for complacency. Evgueni Ivantsov, chair of the European Risk Management Council, cautioned that periods of deregulation often precede another crisis. “Across the industry, risk management, capital adequacy, governance and compliance have all improved substantially since the crisis era,” Ivantsov said. “Having mentioned that, I think that we cannot afford to become complacent. Traditional risks, emerging threats such as AI, crypto assets, cyber dependency, and rapid societal transformation are creating uncertainty. This is a fertile ground for the next potential ‘perfect storm’.”
The current easing of regulations,while welcomed by the banking sector,necessitates continued vigilance and a proactive approach to managing evolving risks in the financial landscape.
