The Bank of England Governor Bailey writes that stronger banks are only part of the stability story as risks increasingly migrate beyond the traditional financial system.
Summary:
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Bailey links past crises to today’s need for vigilance and resilience
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Post-GFC reforms have materially strengthened bank stability
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UK regulatory tweaks aim to support growth without weakening safeguards
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Risks are shifting toward non-banks and market-based finance
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AI and cyber threats add new dimensions to financial stability
Andrew Bailey argues that financial stability remains the essential foundation for sustainable economic growth, drawing lessons from history while warning against complacency in an increasingly complex financial system.
Reflecting on the interwar period following Britain’s return to the gold standard, Bailey notes parallels with the global financial crisis of 2008. In both episodes, systems that appeared robust in calm conditions proved fragile when exposed to large, globally transmitted shocks. Mispriced assets, hidden interconnections and misplaced confidence amplified the damage, leaving long-lasting economic scars.
Bailey contends that the reform agenda introduced after the GFC marked a turning point. Capital and liquidity standards were strengthened under the Basel framework, structural reforms such as the UK’s ringfencing regime were introduced, and stress testing became central to supervision. International coordination was also enhanced through bodies like the Financial Stability Board. As a result, banks today are significantly better capitalised and more resilient.
He points to recent stress events, including the pandemic, geopolitical shocks and isolated bank failures, as evidence that reforms have materially improved the system’s ability to absorb shocks without triggering systemic crises or taxpayer bailouts. However, Bailey stresses that this progress does not justify assuming the regulatory framework is perfectly calibrated.
In the UK, regulators are adjusting rules to better support growth while maintaining resilience, including reviewing capital requirements, easing burdens on smaller banks, and improving access for insurers and foreign institutions. Bailey is clear that these changes do not represent a trade-off between growth and stability; rather, stability is a prerequisite for growth.
Looking ahead, Bailey identifies rising risks beyond the traditional banking sector. Market-based finance, particularly private credit, has grown rapidly and remains opaque in places. The Bank of England’s system-wide stress exercises are now focused on understanding how shocks could propagate across banks and non-banks alike.
He also flags emerging risks from technological change. While artificial intelligence offers productivity gains, it may also amplify correlated behaviour and market volatility. Meanwhile, growing reliance on digital infrastructure elevates cyber risk, reinforcing the need for strong operational resilience to preserve confidence in the financial system.
This article was written by Eamonn Sheridan at investinglive.com.