{"id":92357,"date":"2026-05-17T09:39:26","date_gmt":"2026-05-17T08:39:26","guid":{"rendered":"https:\/\/www.taxresearch.org.uk\/Blog\/?p=92357"},"modified":"2026-05-17T09:39:26","modified_gmt":"2026-05-17T08:39:26","slug":"reevess-reckless-gamble-with-financial-stability","status":"publish","type":"post","link":"https:\/\/www.taxresearch.org.uk\/Blog\/2026\/05\/17\/reevess-reckless-gamble-with-financial-stability\/","title":{"rendered":"Reeves’s reckless gamble with financial stability"},"content":{"rendered":"

Sky News is reporting<\/a> that Rachel Reeves has signed off on proposals to loosen the bank ring-fencing regime, with a formal announcement expected as early as Monday.<\/p>\n

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.<\/p>\n

The timing could scarcely be worse. And the decision could scarcely be more dangerous.<\/p>\n

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.<\/p>\n

Reeves is now dismantling that recognition in pursuit of what she calls growth. This is potentially disastrous, most especially as to timing.<\/p>\n

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.<\/p>\n

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.<\/p>\n

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.<\/p>\n

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.<\/p>\n

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.<\/p>\n

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.<\/p>\n

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.<\/p>\n

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.<\/p>\n

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.<\/p>\n","protected":false},"excerpt":{"rendered":"

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
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