Introduction
On 15th July, the UK Chancellor of the Exchequer, Rachel Reeves, delivered a keynote annual address to the City of London (known as the Mansion House speech) in which she was given the opportunity to reveal the direction-of-travel for the financial services industry.1
The pathway is de-regulation, ‘to unleash the vast potential of the UK’s world-leading financial services sector’, a sector that is supposedly inhibited by ‘red tape’, a phrase for bureaucratic processes that add no value.
Unfortunately, the processes that are to be weakened include those that add value to the taxpayers in protecting them from a repeat of the UK’s version of the 2008 Global Financial Crisis.
Economic background in the UK
Reeves came into power in mid-2024 promising economic growth and greater investment. The most recent economic statistics paint a different picture:
- GDP – down 0.1% in May after falling by 0.3% in April;2
- Interest rate on UK government bonds – 30-year yield at 5.49%;3
- Inflation – running at 3.6%;4
- Unemployment – 4.6%, and 274,000 fewer payrolled employees than a year before;5
- Job vacancies – ‘fell by 63,000, or 7.9%, on the quarter, to 736,000 in March to May 2025’;6
Against this background Reeves claims counter-factually that her policies have ‘delivered stability and a sustainable strategy for investment’. By claiming, albeit falsely, to have secured the base, Reeves can propose that the general economy is ready for a growth phase.
The Leeds Reforms7
The measures to be taken in the financial services sector that should underpin this growth are known as The Leeds Reforms. They were unveiled prior to the Mansion House speech but provide the content for it. The strapline is that red tape will be cut and savers ‘supported to invest’ in shares, as the Chancellor ‘rewires [the] financial system to boost growth’.
These savers are the ones whose annual tax-free allowance for capital gains on shares has been cut (by Reeves), whose pensions will now be subjected to inheritance tax (by Reeves), and whose money Reeves wants to be directed towards UK companies which have just been hit with her increase to Employer National Insurance Contributions and which Labour will soon hit again with the expense of expanded worker rights.
The UK’s version of the 2008 Global Financial Crisis
Underneath this implausible bluster about growth, savings, and investment, the Leeds Reforms promise to dismantle the protections against a repeat of the meltdown in the UK banking industry in 2007-8. This ‘Bust’ followed the ‘Boom’ decade as from Labour’s election in 1997.
The ‘Boom’ consisted of rapid expansion by banks headquartered in Scotland, and by former building societies distributed around the Labour-voting heartlands of the English North and Midlands.
A reckless expansion of real estate lending took place: a factory approach to providing commercial and retail mortgage loans enabled reconstruction of the UK regions most affected by the decline of heavy industry (coal mining, shipbuilding, iron, and steel) during the Thatcher era i.e. central Scotland and the Labour-voting heartlands of England and South Wales.
‘Bust’ replaced ‘Boom’ in 2007-8 when a series of UK mortgage lenders went under: Northern Rock, Bradford & Bingley, Alliance & Leicester, and Halifax Bank of Scotland. The clue is in the names.
The UK taxpayers were made to stand behind the resultant bailout, and taxpayer support finally came to an end only two months ago.8
The root causes of the ‘Bust’ were simple: banks lending too much, spinning a big wheel and taking a volume of risk that generated losses too large for their bases of capital to absorb.
Now Reeves proposes to take us straight back there, as if the ‘Bust’ had never happened and as if Labour had had no hand in seeding the conditions for its occurrence.
Lending too much compared to the borrower’s debt service capacity
Banks and building societies made mortgage loans of too great a multiple of the borrower’s income, both responding to and fuelling the run-away rise in house prices. When a downturn occurred, too many borrowers were unable to meet their payments.
The control belatedly introduced was to limit the size of the loan compared to the borrower’s income. Now Reeves proposes to dissolve that control and have the Bank of England allow more lending at over 4.5 times a borrower’s income.
Lending too much compared to the lender’s own financial capacity
Banks and building societies lent too much as a multiple of their own resources, leaving an inadequate cushion that would enable them to both absorb losses and continue normal operation.
Instead the taxpayer had to bail them out. The post-crisis reforms were meant to ensure that this could never recur. Now Reeves proposes that a key assurance within the reforms – the ‘MREL threshold’ – be watered down, ‘freeing up billions for lending and investment’.9 Indeed, when the MREL threshold is raised, a bank can undertake more lending on the same amount of capital, increasing its own risk-of-failure and the likelihood of a need for a taxpayer bailout.
Savers’ money used to fund speculation in international and investment banking
A further criticism of banks was that they had used savers’ money to finance speculation on financial markets. In response the largest UK banks were required to split their activities in two – one bank would handle all international and investment banking activities, the other (the so-called ring-fenced bank) would handle the safe UK retail activities: current accounts, deposits, day-to-day payments, and mortgages.
Now the ring-fencing regime ‘will be reformed’, which inevitably means ‘weakened’.
Of course ring-fencing was foolish in the first place as only the fall of Royal Bank of Scotland Group could be attributed to international and investment banking activities. The other casualties were all mortgage lenders whose activities would have been housed in the safe ring-fenced bank, thereby concentrating risk and creating losses in the very part of the bank that was meant to be risk-free.
Ring-fencing was a facet of the denial of the true nature and causes of the financial crisis in the UK, a denial enabled by Labour remaining in power until 2010 and curating the diagnosis to spare their own blushes and to obscure their role in egging on the banks and building societies that failed.
Reeves’ proposals are simply an expansion of this air-brushing of the truth.
Bank capitalization
Reeves promises ‘a major review by the Financial Policy Committee of bank capital requirements…to ensure UK banks can compete internationally and provide vital investment in the economy whilst maintaining the international regulatory standards which are crucial to securing financial stability’.
What is so funny about this word-salad is that it shows a complete misunderstanding of what has happened in this area after the financial crisis.
A bank’s capital requirement – i.e. the size of its loss cushion – is calculated through formulae that must make this equation work:
Bank capital must be 7-10% or more of a figure – called ‘Risk-Weighted Assets’ or ‘RWAs’ – that represents the volume, value, and type of business the bank is doing and who with.10 11
7-10% is double what it was before 2008. To compensate for this the computations of RWAs permit virtually all business to be expressed at well below its nominal value and in some cases at zero (business with public entities) or near zero (derivatives).12 13
The capital quotient has doubled from 4% to 7-10% as a percentage of RWAs, but the formulae for RWAs have caused them to drop by 75% compared to the equivalent inputs into the calculation before 2008. The same amount of capital now causes the bank to look much better capitalised. It isn’t, of course. It is less well capitalised. This is a global phenomenon, for which Italy’s Monte dei Paschi di Siena and Unicredit are prime exponents.14
Reeves, not understanding any of that, wishes to reduce bank capitalisation even further, following in the great tradition of her role model, Gordon Brown, who sat at the helm for the entirety of the ‘Boom’ and ‘Bust’, and was allowed to pronounce that the Global Financial Crisis was the first crisis of globalization, rather than that its UK iteration was substantially his own fault.
Summary and conclusions
Reeves comes over as someone who denies the results of her own measures, and as someone who promotes reckless policies whilst talking about stability.
Denial appears to be the strongest characteristic, in that her Leeds Reforms demonstrate no understanding of why the controls that she now proposes to weaken were required in the first place.
This lack of understanding appears to be part of her own and her party’s institutional denial of what happened when they were previously in power between 1997 and 2010, and of their role in engineering a false ‘Boom’, and thereby creating a bubble that popped at a colossal cost to the UK taxpayer.
Reeves proposes that the financial industry be encouraged once again to spin a big wheel based on too little of its own resources. The same result beckons: taxpayers on the hook again when ‘Boom’ turns to ‘Bust’.
Perhaps the only difference is that the general UK economy looks quite close to a ‘Bust’ already. One lives in hope that the ‘Bust’ fully materializes and quickly, therewith interdicting the implementation of the Leeds Reforms and many other aspects of Reeves’ programme and the programmes of her other government colleagues.
1 https://www.gov.uk/government/collections/mansion-house-2025 accessed on 16 July 2025
2 https://www.ons.gov.uk/economy/grossdomesticproductgdp/bulletins/gdpmonthlyestimateuk/may2025 accessed on 16 July 2025
3 https://tradingeconomics.com/united-kingdom/government-bond-yield accessed at 09:37 UK time on 16 July 2025
4 https://www.theguardian.com/business/2025/jul/16/uk-inflation-labour-economic-scrutiny accessed on 16 July 2025
5 https://www.ons.gov.uk/employmentandlabourmarket/peoplenotinwork/unemployment accessed on 16 July 2025
6https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/jobsandvacanciesintheuk/june2025 accessed on 16 July 2025
7 https://www.gov.uk/government/news/leeds-reforms-to-rewire-financial-system-boost-investment-and-create-skilled-jobs-across-uk accessed on 16 July 2025
8 https://www.gov.uk/government/news/government-completes-exit-from-natwest–2 accessed on 16 July 2025
9 MREL is a term for the minimum cushion of capital that a bank must hold in order to have an adequate loss cushion to support a given volume of lending
10 Before the crisis, the quotient was more like 4%, and any range was due to local regulation; now the range is due to the size of bank, and there are global rules for the base level of capital and the increments relating to the bank’s size and type, referred to as its Systemic Importance
11 https://www.lyddonconsulting.com/risk-weighting-how-to-fake-up-resilience-in-a-banking-system/ accessed on 16 July 2025
12 https://www.lyddonconsulting.com/the-eu-banking-system-has-massively-exaggerated-the-amount-of-its-cushion-against-losses/ accessed on 16 July 2025
13 https://en.irefeurope.org/publications/iref-newsletter/article/the-collapse-of-hedge-fund-archegos-exposes-weaknesses-in-the-basel-rules/ accessed on 16 July 2025
14 https://www.lyddonconsulting.com/unicredit-capital-position-before-merger-with-monte-dei-paschi-di-siena/ accessed on 16 July 2025
Photo by Alicja Ziajowska
