The Monetary Policy Committee (MPC) of the Bank of England (BoE) cut its Bank Rate in December after a narrow 5-4 vote by members but signalled that the already gradual pace of lowering borrowing costs might slow further. After a big drop in the UK inflation rate and a new BoE forecast that the UK economy is stagnating, five MPC members voted to lower the BoE’s benchmark rate for the sixth time since August 2024 to 3.75% from 4.0%. A further cut of 0.25% to 3.50% is expected in Q1-2026. However, BoE Governor, Andrew Bailey, has cautioned that inflation still posed some risks and that interest calls will become closer while he expects the pace of cuts to ease off at some point. Interest-rate-sensitive two-year gilt yields rose slightly as investors saw a slightly less chance of more than one rate cut next year.
The Financial Stability Board (FSB) – which coordinates financial rules for the Group of 20 economies – has reported that the total exposure of the non-bank financial sector (commonly referred to as the “shadow banking” sector) stands at £193.0 trillion at the end of 2024 and represented 51% of global assets. Over a one-year period the sector has expanded at double the rate of the traditional banking industry. The FSB reported that the sector’s year-on-year growth of 9.4% – compared with the banking industry’s 4.7% – was helped by a buoyant risk appetite, thanks to rising asset prices and lower interest rates. The sector’s rapid expansion is a growing concern for global regulators who worry about its lack of transparency and the risks involved that could endanger broader financial markets. Non-bank financial intermediaries involved in the “shadow banking” sector includes (among others) money market funds, hedge funds, private credit providers, pension funds and insurers.
Industry sources believe that compensating UK consumers for mis-sold car loans could cost billions of pounds more than regulators have estimated that would throw into doubt plans for payouts in 2026 to resolve one of the UK’s most expensive mis-selling scandals. The Financial Conduct Authority (FCA) published a consumer compensation proposal in October that estimated the scheme would cost lenders about £11.0 billion. However, industry estimates are closer to £18 – £20 billion. The compensation scheme is also a test for the FCA which is under pressure from the UK Government to support economic growth by easing the regulatory burden on financial services.
Bank of England (BoE) Governor, Andrew Bailey, has said he wants to remove as much interest rate risk as possible from the BoE’s balance sheet, suggesting he will seek to largely eliminate its remaining £553 billion of gilt holdings. Mr. Bailey said he wants to replace reserves created by past gilt purchases with repo facilities that would allow commercial banks to temporarily obtain BoE reserves using their own gilt holdings as collateral while putting the interest rate risk back into the private sector.
The Financial Conduct Authority (FCA) has launched a wide-ranging consultation on a range of proposed rules for the crypto industry with the aim of regulation being in place by October 2027. The FCA has set out its proposals alongside research that shows that the proportion of UK adults holding crypto has fallen by a third in the past year from 12% to 8%. Global regulators are playing catch-up on rules for the crypto industry with the UK seeking to align its regulation with the U.S. rather than the European Union.
During the month, S&P raised the outlook for ABN Amro Bank NV to “Positive” to reflect agency expectations that, as a result of its updated strategic plan, the Bank will demonstrate consistent profitable growth and improve its operational efficiency while maintaining its solid risk profile and strong capital base. S&P has also raised the outlook for Commerzbank AG to “Positive” in recognition of its enhanced solid domestic market position and diversification as it executes its Advanced Momentum Strategy that is expected to deliver stronger and more consistent risk-adjusted profitability by substantially delivering on its main strategic targets in the next two years. In addition, S&P raised the outlook for Deutsche Bank AG to “Positive” to reflect agency expectations that the Bank will achieve balanced franchise/revenue growth, maintain cost/underwriting discipline and demonstrate positive operating leverage as a result of the success of its transformation into a more focused and predictable organisation. Meanwhile Fitch upgraded the long-term credit rating of Saudi National Bank to reflect the agency view of a higher systemic importance of the Bank when compared with its domestic peers that resulted in an upgrade of its Government Support Rating (GSR).