LONDON: The banking sector is growing frequently and costly, reasoning of financial crises in United Kingdom.
The sector is on course to double from its current size to more than 950 per cent of UK gross domestic product by 2050, far outstripping projected increases in other Group of 20 nations, the BoE said in a report.
This would equate to a rise in banking assets from £5tn to about £60tn.
While some analysts have argued that large banking sectors are dangerous, there is not a strong link between size and the probability or cost of a big financial meltdown, the BoE said in its quarterly bulletin.
The BoE found that high levels of indebtedness at banks and periods of strong credit growth were stronger indicators of impending crises. However, the fiscal costs of a crisis can be higher if a country has a large banking sector.
“While size can be important, it is the resilience of the banking system that is key for financial stability,” the report concluded.
The study represents an attempt to provide analytical back-up to Mark Carney, the BoE governor, who in 2013 dismissed those who reacted “with horror” at the notion of a growing banking sector, saying it brought benefits.
“It is not for the Bank of England to decide how big the financial sector should be,” he said. “Our job is to ensure that it is safe. The UK can host a large and expanding financial sector safely if we implement a reform agenda that extends well beyond domestic banking.”
The UK has the largest banking sector in a group of leading countries comprising Japan, the US and the 10 biggest EU nations. Whereas it was worth 100 per cent of GDP in 1975, this figure has now ballooned to 450 per cent.
Britain has emerged as a hub for the industry because of the perceived benefits of “clustering”; comparative advantages bestowed by factors such as its time zone and openness to trade and capital flows; accidents of history; and implicit subsidies associated with banks that are too big to fail, the article found.
There was evidence that the subsidies had already been “substantially reduced” because of regulatory change, it added.