The Bank of England has proposed a significant relaxation of regulations on lenders, marking the most significant change since the 2008 financial crisis. The aim is to reduce the reserves that banks are required to hold to safeguard against collapse, with the expectation that this move will lead to increased lending to individuals and businesses, ultimately stimulating economic growth.

However, alongside this announcement, the Bank of England issued a caution regarding a potential “sharp correction” in the value of primarily US tech companies, raising concerns about a bubble in artificial intelligence. Additionally, the Bank highlighted that UK stock prices are currently at their most elevated levels since the 2008 global financial crisis. Despite mounting stock market concerns, Bank Governor Andrew Bailey defended the decision to ease capital regulations, emphasizing the resilience of the banking system in the face of significant economic shocks.

Bailey refuted suggestions that the Bank’s actions could precipitate another financial crisis or indicated a failure to learn from past mistakes. Emphasizing the prudence of the decision, he stated that banks would not be directed on how to utilize the freed-up funds, but stressed the importance of supporting the economy through increased lending to enhance overall economic strength.

Under the proposed changes, banks’ capital requirements are set to decrease from around 14% to 13% of their risk-weighted assets. These requirements dictate the reserves banks must maintain to mitigate risks associated with lending and investments, established post-2008 to prevent reckless behavior and safeguard against failure.

A recent review by the Financial Policy Committee revealed that UK banks currently hold less risky assets compared to early 2016, indicating a robust and resilient banking system capable of supporting households and businesses even in adverse economic conditions. Investment director Russ Mould commended UK banks for successfully passing the Bank of England’s stress test, citing lessons learned from the 2008 financial crisis that have strengthened the industry.

While acknowledging increased threats to financial stability and potential market corrections, the Bank remains optimistic due to low levels of household and corporate debt in the UK. The stress test results have instilled confidence in the Bank of England, prompting a reduction in the estimated capital banks are required to hold, a move likely to be welcomed by the government for its potential to stimulate economic growth through increased lending.