BoE governor warns government against watering down bank ringfencing rules
Bank of England governor Andrew Bailey has warned MPs that watering down post-2008 financial crisis bank ringfencing rules would be bad for British households, and would not help banks either.
Testifying to the Treasury Committee this morning (highlights start here), Bailey insists that there isn’t a trade-off between financial stability and growth in the economy.
He reminds MPs that Parliament created a great deal of detail when they legislated the ringfence rules after the financial crisis. Perhaps some of that detail could be improved, but he insists the ringfence mustn’t be torn up.
Ringfencing protects UK retail banking from shocks originating elsewhere in the group and in global financial markets.
Last week, chancellor Rachel Reeves promised “meaningful” reforms to the UK’s ring-fencing rules, prompting warnings from some of the architects of the UK’s post-2008 reforms.
Today, Bailey says the ringfence rules are an important part of the structure of the financial system. Crucially, he explains, they make it easier to resolve a failing bank.
He tells MPs:
“It has benefits, particularly, in terms of UK customers and UK consumers; businesses and households. I think that is a helpful feature of it. I don’t think it hinders banks fundamentally in terms of their business models.
“Again, at the margins, I am sure there are things that can be improved and we will work constructively to go through that process.
“It has established itself as part of the system and to me it would not be sensible to take it away at this point.”
Key events
The Lords turn to tax.
Q: Since the war, no government until now managed to bring in more than 35% of GDP in taxation. It’s now around 37.5% – what level do you think is sustainable?
Reeves says the Office for Budget Responsibility (the fiscal watchdog) forecasts tax will hit 38% of GDP at the end of the parliament – that’s not a target though!
Increasing GDP is the best way to reduce that ratio without cutting investment in public services, she says.
Rachel Reeves is then asked why the UK economy is suffering from slugging growth, rising unemployment, stubborn inflation.
Q: What’s your diagnosis of the ills of the UK economy?
The key problem is productivity, and investment is the answer, the chancellor replies.
Reeves adds that trade policy is another important area of reform.
She cites the UK becoming the first country to reach a trade deal with the US, plus the “reset” with the European Union and a trade deal with India.
Rachel Reeves then cites the government’s changes to the planning system, which are currently being considered by the House of Lords.
She urges the Lords to pass the planning and infrastructure bill quickly, so that the UK can get on with “getting things done”, such as transport and energy infrastructure, or new data centres.
The chancellor also points to her pensions review, and yesterday’s review of the water sector, as areas where the government are pushing reforms through.
Reeves: We’ll stick to fiscal rules despite geopolitical challenges
The House of Lords economic affairs committee begin by asking chancellor Rachel Reeves about her growth plans:
Q: What is your strategy to achieve growth, without borrowing more than your fiscal rules allow or by boosting current spending more than your tax commitments allow?
Reeves says we are living in an “age of insecurity”, and economic policy has to respond to that.
She also points to her “challenging economic inheritance”, with high levels of tax as a share of GDP, historic high levels of government debt, and “very poor” economic growth over the last 15 years due to weak productivity growth.
So the growth strategy has to address this.
Reeves says the government’s growth strategy is about building “resilience and stability”.
Stability means fiscal rules which the government sticks to – the pledge to fund day-to-day spending through tax receipts, and to have debt falling as a share of GDP while still delivering investment.
Reeves says this stability has allowed the Bank of England to cut interest rates four times in the last year.
We have faced challenges this first year. The international geopolitical backdrop is probably not one that any government would want, but that’s what we have.
Despite that, Reeves insists that the government showed the “political courage and strength” to stick to those fiscal rules in the budget, in the spring statement and in the spending review.
“We will continue to do so,” she pledges.
[Reminder: economists believe Reeves may need to raise taxes in the autumn budget, after borrowing surged over City forecasts in June].
Reeves appears before Lords economic affairs committee – watch it here
Back in parliament, the House of Lords Economic Affairs Committee are holding a session with chancellor Rachel Reeves.
You can watch it here:
The IMF are also warning that tariffs are not the answer to widening current account balances.
In their latest External Sector Report, just released, the Fund says:
A further escalation of trade tensions, including with tariffs, would have significant negative macroeconomic effects, with limited efficacy in correcting global imbalances.
The IMF also note that higher tariffs would reduce global demand in the short term and add to inflationary pressures through rising import prices.
It would be better, they suggest, for countries to address their own domestic imbalances.
IMF: Global current account balances have widened
The International Monetary Fund is concerned that global current account balances are widening, potentially putting strain on the international monetary system (IMS).
In a new report, just released, the IMF show that global current account balances widened by “a sizable 0.6 percentage points of world GDP in 2024”.
That is a notable reversal of the narrowing since the global financial crisis and may signal a significant structural shift, they warn, with some countries running up larger deficits and others piling up larger surpluses.
In a blog post, IMF chief economist Pierre-Olivier Gourinchas says that around two-thirds of the widening in global current account balances in 2024 was “excessive”, writing:
The increase in excess balances is the largest in a decade, driven primarily by China (+0.24 percent of global GDP), the US (-0.20 percent) and more modestly by the euro area (+0.07 percent).
Gourinchas adds that “a growing asymmetry in global trade and financial networks” is taking hold, and identifies three factors to watch:
First, while global imbalances are resurfacing, geopolitical considerations are increasingly shape bilateral trade, direct investment and portfolio flows, reducing direct interactions between more geopolitically distant jurisdictions. Ultimately, this could open the way for a fragmented multipolar IMS. While it is debatable whether an integrated unipolar or integrated multipolar system would be more beneficial to the global economy—history provides little guidance and theory is ambiguous—a fragmented multipolar IMS would almost surely be less desirable than an integrated one, with a potential for increased global financial volatility and greater misallocation of resources.
Second, the recent escalation of trade tensions coupled with the threat of possible financial tensions, rising US debt levels and a softening of the US exorbitant privilege may have caused some global investors to reassess the extent of their dollar exposure. So far, markets developments have been orderly, with an increase in demand for dollar hedging and an 8 percent depreciation of the US dollar since January, the largest halfyear decline since 1973, albeit after the multi-decade high of 2024.
Third, digital innovation for cross border transactions, such as the rise of US dollar stablecoins, could reinforce dollar dominance but could also create financial stability risks.
Coca-Cola says new cane sugar drink is coming
Another US stalwart, Coca-Cola, has reported sales growth in the last quarter.
Coca-Cola has reported that its second-quarter organic revenues grew 5% in April-June, due to a 6% rise in prices while global unit case volume declined 1%.
James Quincey, chairman and CEO of The Coca–Cola Company, says:
“Amid a shifting external landscape in the second quarter, the ability of our system to stay both focused and flexible enabled us to stay on course in the first half of the year.”
The company has also announced it will launch a Coca-Cola offering “made with US cane sugar”, as part of its “ongoing innovation agenda”.
Last week, president Trump pre-empted this announcement, posting on Truth Social:
I have been speaking to Coca-Cola about using REAL Cane Sugar in Coke in the United States, and they have agreed to do so. I’d like to thank all of those in authority at Coca-Cola. This will be a very good move by them — You’ll see. It’s just better!
GM profits fall as after $1.1bn hit from trade war
Over in the US, carmaker General Motors has reported that its profits fell by a third in the last quarter, after Donald Trump’s trade war cost it more than a billion dollars.
GM made a profit of $3bn in the second quarter of this year, on an EBIT-adjusted basis, down from $4.4bn in April-June 2024.
GM told shareholders that tariffs had a net impact of $1.1bn on its earnings in Q2, “reflecting minimal mitigation offsets” It also warned that it expects the net impact of tariffs to be higher in the third quarter of 2025, due to the “timing of indirect tariff costs”.
A 25% import tax on engines, transmissions and other key car parts is now in force in the US, while manufactures also face new tariffs on steel and aluminium imports.
GM is sticking with its estimate that the gross impact of tariffs will be between $4bn and $5bn this year, adding that it is making “solid progress to mitigate at least 30% of this impact through manufacturing adjustments, targeted cost initiatives, and consistent pricing”.
CEO Mary Barra reminded investors that it is investing more in its US manufacturing, telling them:
For example, in June we announced $4 billion of new investment in our U.S. assembly plants to add 300,000 units of capacity for high margin light-duty pickups, full-size SUVs and crossovers. This will help us satisfy unmet customer demand, greatly reduce our tariff exposure, and capture upside opportunities as we launch new models.
The capacity begins coming online in just 18 months, after which we project building more than 2 million vehicles in the U.S. each year as we scale.
[Reminder, yesterday fellow carmarker Stellantis cut its 2024 profit forecast and warned it will burn through more cash than expected, after being hit by tariffs].
BoE governor questions need for digital pound
The Bank of England governor has cast doubt on whether the UK’s central bank will introduce a digital currency, having worked on the project for several years.
Andrew Bailey told the Treasury committee that he would need “a lot of convincing” to push through the plan, if existing work to push digital technology into the commercial bank payment systems is a success.
He tells MPs that the BoE will work with banks and the market to develop digital technology in the commercial bank payments systems, particularly the faster ones, which are the main payment systems of the country.
Bailey explains:
That’s a sensible place to do it because that’s where most of our money is.
My view is, if that’s a success I quesion why we need to introduce a new form of money.
Bailey says improving commercial banks’ digital payments systems could lead to “huge benefits”, such as smart contracts, reducing fraud, reducing costs, and improving late payments to small firms.
This could be the best way to get digital technology into the payments system, he suggests, compared to the alternative of a retail central bank digital currency (CBDC, or digital pound) or the growth of stablecoins (eg non-bank money).
Bailey insists he is “not saying no” to a CBDC, but adds:
If the work with the commercial banks is successful, I would need a lot of convincing that the use case was made.
Bloomberg reported this morning that Bank of England officials are mulling whether to set aside plans to create a digital pound for households amid growing skepticism about the project’s benefits.
Bailey also reminded MPs that China has launched a CBDC, while the European Central Bank is pressing ahead with its plans for a digital euro.
Bailey: Success in financial stability is when nothing happens
Q: Do you have red lines about the deregulation of UK financial rules, governor?
Andrew Bailey says he has two very strong red lines.
1) he repeats that there isn’t a trade-off between financial stability and growth
2) he shows exasperation about people who say the financial crisis is deep in the past, and solved, so we can move on.
Summing up the challenge of protecting the UK financial system, Bailey says:
Success in financial stability is when nothing happens. The fact we’ve had market volatility this year and we haven’t had a financial stability problem, we’re not worrying about banks failing or worrying about the markets, is of course a success.
Bailey then declines to back Rachel Reeves’s comment that regulation is acting as a “boot on the neck” of financial firms, saying:
“I don’t use those terms, let me say that… It is not a term I use.”
Q: But is there a problem with overregulation of financial services firms?
Bailey repeats that the Bank is open to looking at the rules, but insists:
We can’t compromise on basic financial stability. That would be my overall message.
BoE governor warns government against watering down bank ringfencing rules
Bank of England governor Andrew Bailey has warned MPs that watering down post-2008 financial crisis bank ringfencing rules would be bad for British households, and would not help banks either.
Testifying to the Treasury Committee this morning (highlights start here), Bailey insists that there isn’t a trade-off between financial stability and growth in the economy.
He reminds MPs that Parliament created a great deal of detail when they legislated the ringfence rules after the financial crisis. Perhaps some of that detail could be improved, but he insists the ringfence mustn’t be torn up.
Ringfencing protects UK retail banking from shocks originating elsewhere in the group and in global financial markets.
Last week, chancellor Rachel Reeves promised “meaningful” reforms to the UK’s ring-fencing rules, prompting warnings from some of the architects of the UK’s post-2008 reforms.
Today, Bailey says the ringfence rules are an important part of the structure of the financial system. Crucially, he explains, they make it easier to resolve a failing bank.
He tells MPs:
“It has benefits, particularly, in terms of UK customers and UK consumers; businesses and households. I think that is a helpful feature of it. I don’t think it hinders banks fundamentally in terms of their business models.
“Again, at the margins, I am sure there are things that can be improved and we will work constructively to go through that process.
“It has established itself as part of the system and to me it would not be sensible to take it away at this point.”
Bank of England governor Andrew Bailey then reminds MPs about the surge in certain tech stocks this year, to explain the rebound in markets since their April wobble.
He tells the Treasury committee:
Here’s a striking fact. The market cap of Nvidia is now larger than the UK’s GDP.
Nvidia’s shares are up 27% so far this year, giving it a market capitalisation of $4.18tn (or £3.1tn), thanks to strong demand for its high-powered chips to power artificial intelligence systems.
Q: Why have US and global equities bounced back from the initial shock of Donald Trump’s tariffs?
FPC committee member Professor Randall Kroszner replies that it is always “very difficult” to assess market movements (indeed!).
One factor is that the markets weren’t expecting the level and the breadth of the tariff proposals which Trump announced on 2 April, even though the president had talked about them before.
It was then “very helpful for the market” that the president pushed back the date when tariffs will come in, and offered more flexibility for negotiations, Kroszner adds.
[that’s a polite way of pointing to the TACO trade]
Kroszner also points to the passing of the president’s budget bill, which extends previous tax cuts to investment. That has supported investment in the US.
Q: are there any elements in the Leeds reforms that make you nervous, in terms of financial stability?
FPC member Randall Kroszner says the committee will weighs up the costs and benefits of the measures, to assess the impact.
He doesn’t see “a necessary clash” between the reforms and financial stability, but it will depend on the detail of what is changed.
Kroszner also points to risks from the non-bank financial sector.