The UK is (perhaps) finally moving on from the 2008 Financial Crisis

The event, that more than anything, has shaped the political and economic state of the UK today was the 2008 financial crisis.  According to ONS data, GDP growth slowed from an annual average of 3.0% between 1993 and 2007 to 1.5% between 2009 and 2023. Since 2008, UK household incomes have been flat, growing by less than 0.5% per year.   Almost two decades after the crisis, restoring economic growth, which has been further hit by the pandemic and war in Ukraine, has been defined by the Labour Government as its central mission. This desperate need for growth means we are, perhaps, finally breaking from the regulatory orthodoxy that dominated post-2008.

It was interesting to read that Sam Woods, head of the Prudential Regulation Authority (PRA) which oversees the City, recently said the explosion of rules since the financial crisis has been “overcooked” and he is working to simplify the requirements that people believe are holding back businesses.  Last year, the Government introduced a secondary objective for the Financial Conduct Authority (FCA) and the PRA, which mandates that these regulators must “facilitate the international competitiveness of the UK economy … and its medium to long-term growth.”

How to deliver growth is of course a subject of debate. Winston Churchill once said if you put two economists in a room, you get two opinions (three if John Maynard Keynes is there).  One of the key opinions that has caught hold, is that since the financial crisis, the UK financial services sector has become too risk averse and overburdened with regulation, and that is hindering growth.  Businesses are struggling to access capital.  The current moribund nature of the UK capital markets is evidence of this, with companies choosing the more buccaneering US market.

Whether a change in regulation can achieve the desired effect will need to be seen, but it feels like an emotional Rubicon has been crossed.  One of the interesting things about economic history is the power of emotion and perception.  Arguably, German economic thinking is still wedded to fears of the hyperinflation experienced in the 1930s after the Wall Street Crash. The idea of people using wheelbarrows to carry the cash needed to buy bread has a mythical quality. In reality, hyperinflation was short lived, but the image has stuck. 

The modern British equivalent of ‘wheelbarrows full of bank notes’ is queues outside Northern Rock. This moment changed the perception of the City in the eyes of the public and politicians.  From the 80s, the City of London was seen as the driver of the UK economy, and people revelled in the idea of it being full of risk takers, especially compared to our continental peers. As someone who grew up in the 80s, City traders were a great example of the Thatcherite dream (or nightmare depending on what side of the political fence you were sat).

2008 was a turning point, with the public being told to blame reckless City bankers by politicians for the crash, but who themselves in turn were blamed for being too soft in terms of regulation.  Regulation was massively tightened, and banker remuneration was curtailed. When in 2011, Bob Diamond, then CEO of Barclays, said the “time for banker remorse was over”, he was trying to encourage the idea that risk taking needed to start again, but was roundly criticised. The public had not yet moved on from the financial crisis and blaming bankers.  Politicians responded accordingly and kept regulation firmly in place.

14 years later, it is interesting that perhaps we have finally moved on and caught up with Bob Diamond. The UK has removed rules restricting bankers’ bonuses, and Labour politicians are actively looking at rolling back regulation.  Maybe, fears over stagnation have finally overcome worries about risky bankers and queues outside Northern Rock.