Bank of England governor Andrew Bailey has defended tough regulations introduced after the financial crash, saying it could not take any blame for restricting investment and productivity growth.
As the Chancellor prepares to pare back red tape in the financial sector, Mr Bailey warned of a “risk of history repeating itself” after the regulations put in place had seen economies manage their way through large shocks such as the pandemic and the longest war since 1945.
“We have come through, so far at least, without a crisis of financial stability of the sort that has been seen in the past,” he said. “Likewise, we have not had a major and lasting recession during these recent shocks.”
Addressing the Klass Knot Farewell Symposium, Mr Bailey rejected the idea that the economy had reached “the stability of the graveyard where nothing moves, there are no big dramas, because the system is moribund.
“Not true, is my response. The financial system has evolved and continues to do so.
“The record of the last 15 years indicates that the financial system has played its part in supporting economies through a series of severe shocks, and has acted to absorb rather than amplify these shocks. I would emphasise here that financial stability is not an end in itself. Rather, the goal is to support economic activity.”
Mr Bailey, who was recently made chair of the Financial Stability Board, argued that “there is no trade-off between financial stability and objectives like growth and competitiveness.
“I push back at the line of argument that post-crisis financial regulation caused the fall in productivity growth, by restricting business investment in the economy.”
His comments will be regarded as a clear rejection of the Chancellor’s accusation that Britain’s watchdogs are a “boot on the neck of businesses”.
“As time passes memories of a financial crisis fade and this leads to a questioning of the continuing need for the responses,” he said. “This creates the risk of history showing signs of repeating itself, remembering back for instance to the strength of the deregulation argument before the financial crisis.
“Those of us… who are veterans of dealing with the financial crisis, don’t tend to forget, but I can see evidence in today’s world of the truth of [American economist] Minsky’s observation” that memories of financial crises wane over time.”
Mr Bailey will be in Edinburgh on Monday to deliver a keynote speech to the Global Investment Summit.
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