The governor of the Bank of England has predicted that the financial sector could double in size to be 20 times as big as GDP within the next 25 years, but warned that the government must hold its nerve and resist pressure to water down regulation after Brexit.
Speaking to the Guardian to mark the 10th anniversary of the start of the global financial crisis in August 2007, Mark Carney said a thriving City meant more jobs, tax revenues and exports. But the governor said the City should not be allowed to expand rapidly if it meant repeating the risky speculation of a decade ago.
Carney dismissed suggestions that London could become a financial centre with only light-touch regulation – often dubbed Singapore-on-Thames – in order to attract business after the UK left the EU.
He said the size of the financial sector would increase relative to the size of the economy if things went according to plan after Brexit and that meant there could be no going back to the lax regime that existed before 2007.
The Bank, he said, was aware that “we have a financial system that is ten times the size of this economy … It brings many strengths, it brings a million jobs, it pays 11% of tax revenue, it is the biggest export industry by some token … All good things. But it’s risky”.
He went on: “We have a view… that post-Brexit the level of regulation will be at least as high as it currently is and that’s a level that in many cases substantially exceeds international norms.
“There’s a reason for that, because we’re not going to to go the lowest common denominator in a system that is 10 times size of GDP. If the UK financial system thrives in a post-Brexit world, which is the plan, it will not be 10 times GDP, it will be 15 to 20 times GDP in another quarter of century because we will keep our market share of cross-border capital flows. Well then you really have to hold your nerve and keep the focus.”
The annual output of the UK economy (GDP) is about £1.9tn a year, but that is dwarfed by the assets of the financial sector, which includes banks, pension funds and insurance companies.
Carney has previously insisted the City has an important future role, despite Brexit, warning that European economies need to retain access to the City of London because the UK is the “investment banker for Europe”.
America’s national bank regulator has this week begun a consultation that could lead to a watering down of the Volcker rule - a post-crisis reform intended to restrict banks from using their own money to take bets on financial markets.
The City has been at the centre of much of the Brexit debate in the UK, with many foreign-owned banks threatening to move business out of London. But speculation that the City could become a low-tax financial centre with a bonfire of regulations was firmly stamped on by Carney.
The governor said central banks and financial regulators had to keep up their guard because the passing of time meant people started to forget why the rules had been put in place.
“The problem you have is that the same issues re-emerge under different labels … and the progress that’s been made … is gradually chipped away,” said Carney.
“There will always be innovations, there will be new strains, new vulnerabilities, old wine in new bottles, that will emerge around the periphery of the system. The challenge is for institutions such as the Bank is to anticipate those problems without snuffing out innovation,” he added.
The crisis that gripped the markets from the summer of 2007 took hold on 9 August that year when the French bank BNP Paribas announced it had blocked withdrawals from funds because of a “complete evaporation” of liquidity. Banks stopped lending to each other, the financial system seized up and six weeks later that resulted in the run on Northern Rock.