Rachel Reeves warned that deregulation risks financial crisis

Times

3 days ago

The governor of the Bank of England has warned Rachel Reeves that cutting red tape on the banking sector risks sparking another financial crisis as he downplayed the rise in UK government debt costs.
Andrew Bailey told a group of influential MPs on Tuesday that rolling back restrictions on the City and ditching bank ringfencing guidelines could destabilise the UK financial system and 'would not be [a] sensible' decision for the time being.
In a near two-hour long session with the Treasury select committee before the parliamentary summer recess, Bailey also said that the rise in long-term government debt costs was not 'unique' to the UK. He said investors were ditching US assets to curb their exposure to the dollar owing to concerns about the economy since President Trump returned to the White House.
The governor, who, alongside his role at the central bank, recently took up the chairmanship of the Financial Stability Board, said he could understand why some people would think that 'the financial crisis is now way in the past, we've got past that, that's all solved, that's all out of the way, move on'.
However, he said that 'for those of us who were veterans of sorting the problems of [the financial crisis] out' there remained a live threat to financial stability which required lawmakers to retain robust regulations.
His comments come after the chancellor told bankers at the annual Mansion House dinner this month that the UK's regulatory regime was a 'boot on the neck' of businesses which risked 'choking [them] off'. Bailey, 66, said he would not have used such phrasing.
Reeves announced that the government would reform laws that require lenders to separate their retail and investment banking businesses, a requirement put in place after the 2008 global financial crisis to shield depositors from banks' riskier activities.
Several City grandees, including Sir John Vickers, the architect of the ringfencing rules, have expressed concern at the government's deregulation drive, which is intended to reverse weak economic growth.
Bailey also downplayed the rise in UK government borrowing costs and said that it was part of a worldwide trend created by Trump's volatile tariff policymaking and a general rise in public deficit spending.
'We've seen an increase in term premium in government bond markets… yield curves have steepened', Bailey said, adding this was 'a global phenomenon, it is not in any sense unique [to the UK]'.
The rate on the 30-year UK government bond, or gilt, stands at 5.43 per cent, up from 4.67 per cent compared to a year ago. The yield, which moves inversely to prices, on the US equivalent has risen to 4.93 per cent from 4.48 per cent over the same period.
Bailey's comments come as figures from the Office for National Statistics on Tuesday showed that UK debt interest spending jumped to £16.4 billion in June, the second-highest for that month since the records began in 1997. Government borrowing topped £20 billion in the month also, above the Office for Budget Responsibility's projection for the month, strengthening expectations for tax increases at the autumn budget.
Trump's erratic decision-making on how much to tax imports from specific countries had led to 'rebalancing' among markets 'which involves a reduction in exposure to dollar assets', Bailey said. The dollar index, which measures the greenback against six comparable currencies, is down nearly 10 per cent since the start of the year.
The governor said that, judging by conversations with market participants and based on granular data, 'the most crowded trade in the market at the moment is short dollar'.
He said that since Trump first announced his 'reciprocal tariffs' in April, there had been 'a breakdown in established correlations in markets'.
Stock markets globally jolted lower in the immediate aftermath of Trump's first tariff announcements, with the S&P 500 index posting one of its largest losses since the Great Depression. However, an equity rally has since pushed several indices to a record high. This week, the FTSE 100 closed at its highest-ever level of just over 9,000 points.
Taxes on goods imported to the US from most countries will increase sharply from August 1 after Trump delayed the implementation of his 'reciprocal tariffs' several times.