Banks to benefit from roll back of post-financial crash regulations

Chancellor Rachel Reeves will announce eased ring-fencing rules for commercial banks such as Lloyds, HSBC, Santander and Barclays. Strengthened after the 2008 financial crash, the regulation separates investment banking from retail banking.

Why deregulate banks?

The government aims for the eased regulation to enable big banks to lend more to businesses. The current ring-fencing means banks cannot use deposits from individuals and small or medium enterprises (SMEs) (retail) to lend to huge corporations and governments (investment).

Reeves wants to deregulate and enable an additional estimated £80 billion in lending to businesses. But taking £80 billion that’s backed by the deposits of individuals and SMEs, and using it to increase the excessive profits of large corporations, doesn’t seem like the best move.

In a letter organised by Positive Money in December 2024, 50 academics and experts warned:

Lending to the real economy has consistently made up around just 10% of bank lending in recent decades. The vast majority – around 80% – of bank lending goes towards inflating the price of pre-existing property and other assets.

Inequality is the real issue

In order to increase lending to the real economy, the UK must reduce economic inequality. This disparity is stark: 157 billionaires have wealth to the sum of 22% of the UK’s entire GDP. Meanwhile, more than 14 million people, or 21% of the country, live in relative poverty.

It means there is a huge lack of demand for products and services in the UK as people struggle to meet basic needs.

For example, citizens can’t afford to buy a home, let alone upgrade one. Millions of people upgrading their homes delivers a lot more economic activity than a few super rich people upgrading theirs. But banks aren’t lending to electricians or plumbers to start their own businesses because the demand isn’t there for those businesses to thrive.

What led to the financial crash?

Again, extreme economic inequality is the issue.

The financial crash happened because people didn’t (and still don’t) have enough money to account for inflated house prices.

Before 2008, banks gave people too much credit to make up for it, known as ‘sub prime mortgages’. People then defaulted on the mortgages when house prices fell and rates increased, causing the financial crisis. However, if the super rich weren’t hoarding houses and using them as assets, the crash wouldn’t have happened.

Featured image via Leon Neal/ Getty Images