Sky News is reporting that Rachel Reeves has signed off on proposals to loosen the bank ring-fencing regime, with a formal announcement expected as early as Monday.
Her planned reforms, to be included in a new Enhancing Financial Services Bill, will allow Britain's five largest retail banks, Barclays, HSBC, Lloyds, NatWest and Santander UK, to blur the boundary between their high-street operations and their riskier investment banking arms. The Treasury is framing this, predictably, as a growth measure. Actually, it is a reversal of regulations put in place to prevent a recurrence of the 2008 global financial crisis.
The timing could scarcely be worse. And the decision could scarcely be more dangerous.
Ring-fencing was introduced after the 2008 financial crisis for a simple reason. It was apparent that when banks that hold ordinary people's deposits are also permitted to gamble in wholesale and investment markets, the consequences of their failures fall on the government and then on the public. The firewall between retail and investment banking was designed to ensure that, if speculative activity went wrong, shareholders and bondholders bore the cost, and not depositors or the Treasury. The rign-fencing regime has always been half-hearted and potentially imperfect, but it was serious in its intent. It recognised that banking is not a normal industry and that the state is always its insurer of last resort.
Reeves is now dismantling that recognition in pursuit of what she calls growth. This is potentially disastrous, most especially as to timing.
First, the context matters enormously. We are not living through a period of financial calm. The war in the Middle East is driving up energy costs. Global financial markets are under sustained pressure. The geopolitical environment is the most unstable it has been since the Cold War. This, then, is precisely the moment when financial stability frameworks should be strengthened, not weakened.
Second, the stated rationale is unconvincing. The claim is that loosening ring-fencing will unlock lending to small businesses and infrastructure projects aligned with government objectives. But that is not primarily what investment banking does. Investment banking speculates. It trades in financial instruments. It creates complex products that generate returns for shareholders and bonuses for traders, and when it fails, it creates systemic crises. Allowing retail deposits to support or subsidise that activity, even indirectly, through shared services and reduced funding costs, is not a growth strategy. It is a subsidy to finance capital at the expense of financial security.
Third, the lobbying trail is significant here. The bosses of HSBC, Lloyds, NatWest and Santander wrote to Reeves last year calling for the ring-fence to be scrapped, arguing it put UK banks at a competitive disadvantage. The Chancellor has now obliged. This is not evidence-based policymaking. It is the financial sector writing its own regulatory framework, with a Chancellor too eager (or even desperate) for City approval to resist.
Fourth, the Bank of England has not been a willing partner. The Governor, Andrew Bailey, was clear last year that he disagreed with Reeves's characterisation of regulation as "a boot on the neck of businesses," and that regulators cannot "compromise on basic financial stability." That warning has apparently been overridden by Treasury ambition.
The consequences of this decision, if it proceeds, are not abstract. When, not if, the next financial shock arrives, the exposure of retail banking to investment banking risk will be greater than it would otherwise be. The public, whose deposits underpin the entire system, will be more vulnerable. As I always argue, they are in fact the biggest suppliers of capital to the whole banking system, a fact that the ringfencing system implicitly recognised and which Reeves is now ignoring again. The government, which will once again be called upon to stabilise the banks, will face larger bills as a result. And the households already struggling with energy costs, stagnant wages, and eroded public services will pay the price, yet again, as austerity is imposed.
There is a pattern here. Reeves came to the Treasury committed to earning the City's trust. She has delivered: deregulation of financial services, a search for a more compliant banking regulator, and now the partial dismantling of the most significant post-crisis safeguard. In exchange, the City has given her warm words and lobbying demands for more of the same. They are sending out strong signals that she should not be replaced right now, whatever happens to Starmer. It is easy to see why.
And worst of all, this is not a growth strategy. It is a protection racket run in reverse, with the Chancellor offering concessions to the most powerful actors in the economy in the hope that they will generate activity that might eventually reach everyone else. History tells us trickle-down never works. Reeves is relying on it, yet again.
The right response to financial instability is not to deregulate the institutions most capable of amplifying it. It is to reinforce existing protections, to tax financial speculation appropriately, to ensure that banking serves the real economy rather than extracting from it, and to insulate public services from the consequences of private financial failure.
Reeves should reverse course. If she will not, Parliament must scrutinise the Enhancing Financial Services Bill with the seriousness it demands. The firewall that was built after 2008 was not a bureaucratic obstruction. It was hard-won wisdom. Tearing it down, in the middle of a period of acute global instability, is not bold reform. It is a gamble with other people's money, and as usual, it will be ordinary people who pay when the bet fails.
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‘Growth for the sake of growth is the ideology of the cancer cell’ – Edward Abbey, American author and environmentalist.
Abbey’s words are so apt. Reeves behaviour here is just so irresponsible I can’t think of anything more appropriate to say…………..
That is a correct statement
You couldn’t make this up – after all the ‘lessons learned’ following 2008 <p>
Their instinct since day one seems to do precisely the wrong thing . Not only stupid but dangerous. And the Kings Speech made it clear that they are doing the same thing with nuclear – the regulation of which has been captured by the industry <p>
https://www.thecanary.co/uk/analysis/2026/05/14/nuclear-sector-more-dangerous/
Given that you still don’t understand the difference between deposits I.e. liabilities and bank capital, I’m not sure many people are going to be looking to you for comment on the banking regulations!
Are you still going to claim that banks don’t lend out deposits, whilst at the same time, tell us that this puts these deposits at risk?
The only difference is someone’s are guaranteed by the government. The rest, like all credits in a balance sheet can be list if the bank goes bust. The lack of comprehension is all by you and is staggering.
Those government guarantees should be ended. We might allow £16k as the guarantee to match up with the Universal Credit capital cut off for a successful claim. But I don’t really understand why you are on the side of people guaranteed by government to retain more than that.
As you have previously implied, the 2008 crisis was not caused by an insufficient deposit protection level.
Taking the side of people above the old guarantee level is not a progressive look. Imv of course.
David
about lending out deposits
SEE Bank of England quarterly 2014 no 1
see from page 16 onwards
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/quarterly-bulletin-2014-q1
Hell’s teeth. Crazy idea, timing could hardly be worse. If I understand that, why does RR not?
It would not be a surprise if Rachel Reeves proceeded with this. It would be very, very stupid. It is further illustration of her total unfitness for the post of Chancellor. She is as usual out of her depth and wedded to ‘growth’ and takes her cue from the city. Not much more to say other than we have too many 5th rate politicians around these days!
Agreed
Just whizzed off a letter to my MP Dame Karen Bradley, using your arguments, albeit a little truncated, if you don’t mind. Can’t remember which Select Committee she sits on but think it’s a fiscal one as she was a Chartered Accountant.
Not too sure how hot her understanding of political macroeconomics is, however. I can guess!
Good luck
A key test of whoever replaces Starmer will be whether they reverse this or not. Talk of nationalising utilities is all well and good but if they continue with this sort of deregulation and “ironclad fiscal rules” I think we can conclude it’s all smoke and mirrors.
Agreed
I am quite literally sickened by this, it’s a freedom to go bust. It’s in no-one’s best interest unless the plan is that this is going to result in backdoor nationalisation of all those banks that follow her lead. The banks don’t have to be as stupid as she is. I just hope that this announcement is stopped and permanently put into the “file and forget” category and she realises that a safe bank is a dull bank.
It is interesting that it’s often Labour that decides to scrap financial regulations and play to the gallery on issues like welfare payments and immigration. So determined are they to shake off this reputation for being irresponsible spenders, open border supporters and anti-business that they take steps even conservatives would view as risky or extreme. What they also fail to recognise is that the reputation will never be shaken off. The city will always view Labour with scepticism and anti-immigration supporters will always see Labour as soft on immigration.
Over the past 40 years I think this is what has really caused the damage in so many countries; supposedly left wing or progressive parties seeking favour from groups which will never accept them. They never seem to learn.
I expect when Reeves watches a cartoon she is convinced this time the coyote really will catch the roadrunner…
Its the equivalent of allowing the banks to set up a betting shop
Thank you and well said, John.
I would organise a social media campaign and threaten banks that do not volunteer to maintain the ring fence with a consumer boycott. I would spell it out as describe.
Thank you, Richard.
From July 2007 – June 2016, I worked on such matters, including ring fencing, but on the dark side, and am utterly dismayed how all the post crisis reforms, not just ring fencing, but others and in the west, not just the UK, but not the global south, are being rolled back, watered down etc. These reforms were already watered down.
I will now short western economies and financial institutions. Tick tock.
Thank you, Richard.
I forgot to mention that Barclays, my former employer, was the big loser from ring fencing and no longer having access to cheap liquidity.
I remember the American led investment bank preventing the commercial bank from lending to Japanese clients in Africa, which would have been a first for the bank, as the investment bankers wanted to use the capital for trading. Eventually, the investment bankers prevailed and got the bank to exit Africa, a move it has bitterly regretted since and tried to reverse, but that ship has sailed.
Investment bankers are not interested in the real economy. They should be forced out of business or only allowed to trade using their own money.
It sickens me, and no doubt many others that politicians seem to be totally unaccountable for their actions. If this goes wrong, will she be held personally liable?
The letter I had received back from Buckingham Palace from the Head of Royal Correspondence reflected that the King believes that universal goodness and common sense can and will eventually prevail…..
At the end of the day, he has to do his duty and had to read what was given to him by the Government.
Bottom line – he didn’t have to, he chose to.
Yes – that is true – like his Mum Lizzie did when Boris Johnson prorogued Parliament – she could have put her foot down but did not because it kept her on the royal gravy train.
What makes this even more extraordinary is that Gordon Brown, who was the PM who dealt with the 2007 banking crisis and who I assume, had the ringfencing put in place, is now supposed to be advising the government. I would have thought that he would be screaming ‘Do not do this’
I hope so
I thought Gordon Brown had just being brought on board. Surely after sorting out the mess of the last global crash which many unfairly blamed him for,he would have something to say? Rachel Reeves will go down in history for this and history won’t be kind to her. I remember reading Paul Mason’s excellent book detailing the detailing the regulation that happened here and in the US that made the crash possible. Do we learn nothing from history?
Paul Mason has not
He has rather lost his way sadly.
Sorry but WTF is she doing!
I doubt she knows
The Government are already paying £30-£45 billion per year on the banks’ reserves (ie funding their insurance policy).
Presumably they will need more to cover their gambling.
It is only around £20 billion now.
It could,as you say, grow.
Let’s have the City in a box working for the public good. Stop paying interest on banks BoE deposits. Set a 10 year horizon for assessing ROI on government spending across the board. And set up lots of locally focused and grounded public interest investment trusts around the country, New Town style. Let the City boffins service those. But put VAT on all financial services, NI on unearned income and raise CGT to progressive income tax rates.
We already know that Rachel Reeves doesn’t understand macroeconomics, so we have to excuse her using Plato’s assertion that people cannot be expected to apply knowledge they don’t possess.
So, we have to look to the mandarins in the Treasury who obviously do know how the system works. I am guessing that they are mostly public school and Oxbridge which gives them many connections in the City.
Getting strict or tough with the City would upset these connections and might cause them to lose reciprocal favours when they retire. Of course, they can never talk openly about this due to them being subject to the Official Secrets Act.
Is there anybody evidence the Treasury does know how the system works?
Currently bank with Santander. Should I be switching to, say, Nationwide?
I bank with Nationwide
This isn’t financial advice, it’s based on what I personally experienced in 2008. So these are just my thoughts, to be ignored
Bank with more than one.
Bank with one that has an accessible branch. You may need to talk to a human.
Keep cash available to use for transaction in shops that have the ability to accept it. If necessary, get used to carrying and spending money again.
For me, The nearest supermarket shuts if there’s no power or the internet goes down.
And, be lucky!
I’ve been running down my savings with the Black Horse recently, and spending them into our local economy, but this utter stupidity from HMG is a prompt to finally look at doing with my remaining finances what I did with my comms/tech 8 years ago, say goodbye to the toxic monopolies (and in some cases the criminals) running these industries. Maybe its time to talk to Triodos here in Bristol, or even the Sally Army’s Reliance Bank and the latest from NS&I. We also use Teachers BS & Nationwide. I dumped Barclays over 40 years ago over apartheid, and had National Girobank taken away from me, as was Co-Op bank (thank-you Mr Flowers). Comments on ethical retail banks running current a/c facilities welcome (as long as they dont compel use of phone apps, and allow withdrawals and deposits at the local PO).
I wish I could say I was shocked but I’m not. Remember Reeves is the one who told us years ago, that the Labour Party was not for people on benefits. She really meant it. The Labour Party has zero interest in the poor, the sick the disabled, the vulnerable. None. They serve their paymasters
When they tell us otherwise, they are LYING. Labour serves billionaires the City, foreign oligarchs, criminals, and hostile foreign powers.
We citizens (subjects) are just an inconvenience, whose votes they want to borrow, until they’ve got rid of voting altogether.
I do wish those who are so busy accusing progressives of antisemitism would listen to the Hebrew prophets such as Isaiah 1.21-23
https://www.biblegateway.com/passage/?search=Isaiah%201.21-23&version=CEV
Here is some Jewish commentary on those verses, you will enjoy it!
https://www.chabad.org/parshah/article_cdo/aid/1904319/jewish/Profits-and-Prophets.htm
Thank you
Excellent RobertJ – thank you.