Bank of England Governor Andrew Bailey has stated that financial regulation in the UK should help 'flush out' excessive profits in the banking sector, but should not impose caps on bank earnings. In a speech to business leaders at Mansion House, Bailey argued against the notion that less regulation is always better, calling it 'unhelpfully reductive.'
Bailey Defends Financial Stability as Prerequisite for Growth
'We strongly believe that financial stability is a prerequisite of economic growth,' Bailey said. However, he acknowledged that not every rule is 'perfectly formed' and that the central bank is open to simplifying and adjusting regulations where necessary. He stressed that simply arguing for less regulation is 'unhelpfully reductive.'
Capital Requirements and Excessive Profits
Discussing capital requirements—the amount of cash banks must hold to absorb losses—Bailey emphasized that these rules protect depositors and maintain financial stability. Since the 2008 financial crisis, regulations have been in place to prevent excessive profit-taking and ensure stronger buffers. In recent years, banks have generated higher earnings, prompting debate on whether regulation stifles growth.
Bailey clarified: 'There should not, to be clear, be a cap on returns set by regulators. That is a matter of commercial strategy for firms, and good regulation should help markets to flush out supranormal profits by reducing barriers to entry.' He added that returns should exceed the amount of capital reserves a bank holds for financial stability, stating that 'regulation must therefore strike the right balance.'
Open to Tweaking Rules Amid Criticism
Bailey's comments come amid criticism from some businesses and MPs that financial regulation is hindering economic growth. Last month, Conservative leader Kemi Badenoch argued that the burden of red tape has become too high since the financial crisis, creating a risk-averse culture in Britain's financial industries. She called for an adjustment to capital requirements to release £450 billion for investment.
Bailey responded by affirming the central bank's willingness to question how well red tape is working. 'We are very much open to simplifying and adjusting regulations where needed,' he said. 'But doing so must contribute to sustaining a healthy banking system which can support and foster stronger growth in the economy.'
