UK's financial system remains both a national asset and a
global public good. Domestically, there are over 1 million
financial services jobs, two-thirds outside London. Financial
services run a trade surplus of 3% of GDP, while the rest of
the economy runs a deficit almost twice as large. Last year,
the UK financial system channelled £300 billion in
finance to UK businesses and helped 700,000 households to
purchase homes. It provides pensions to 21 million people and
insures the contents of 20 million homes. It contributed 11% of
annual tax revenues or over £1.25 billion per week in
Internationally, the UK is the pre-eminent financial centre.
It accounts for 40% of global foreign exchange volumes and
trades in over-the-counter interest rate derivatives. More
international banking activity is booked here than anywhere
else. The UK hosts the world's second largest asset management
and fourth largest insurance industry. The City is Europe's
investment banker, and it is leading the internationalisation
of green, Islamic, renminbi and rupee finance.
Being at the heart of the global financial system reinforces
the ability of the rest of the UK economy, from manufacturing
to the creative industries, to compete globally. And it
broadens the investment opportunities and risk-adjusted returns
for UK savers.
I want to set out some of the ways the UK financial system
can continue to serve the UK and the world in the face of major
Core attributes of UK leadership
The City's pre-eminence reflects lessons learnt over the
centuries that an effective financial system must be resilient,
fair and dynamic.
Resilient so that it can finance households and
businesses through good times and bad. A resilient system is
anti-fragile – robust even to risks we do not
To this end, we have comprehensively reformed the financial
system since the crisis. Both capital requirements and
contingent liquidity have increased ten-fold. The major UK
banks now have the balance sheets to withstand a disorderly
cliff-edge Brexit, however unlikely that may be. A series of
measures have eliminated toxic forms of shadow banking and are
transforming the rest into resilient market-based finance.
An effective financial system is fair: fair to
end-users and fair to the taxpayers who provide the ultimate
backstop to the system.
Fairness requires markets that are professional and open, in
which everyone is accountable for their actions. That is why
the UK has led the global effort to address misconduct and
restore trust in financial markets. We have sharpened
incentives through compensation rules that align risk and
reward. The Senior Managers Regime has re-established the link
between seniority and accountability. And the private sector is
developing standards of market practice that are well
understood, widely followed and up-to-date with market
An effective financial system is dynamic. With the
foundations of resilience and fairness reinforced, the UK
financial sector is innovating to serve the changing real
economy just as it did during three industrial revolutions and
two waves of globalisation.
During the 18th century, regional banks acted as venture
capitalists, providing equity to power the first industrial
revolution.3 In the mid-19th century, the City
underwrote vast issuance of railway securities, spurring the
creation of stock exchanges and the development of modern
During the first wave of globalisation in the 19th century,
the development of correspondent banking and trade credit
services drove an explosion in global trade, hedged by a step
change in activity in the Lloyd's market.5 During
the second wave of globalisation in the 20th century, London
quickly embraced new information technologies, becoming the
first major centre to adopt electronic trading. The UK's
openness to foreign currency banking, beginning with the
creation of the Eurodollar market, spurred a renaissance of
global capital flows. This financed enormous efficiencies
through new global supply chains and unprecedented prosperity
by opening up emerging markets.6
Throughout the centuries, it's been clear that private
innovation works best when it is grounded in the right public
infrastructure. That includes hard infrastructure –
from liquidity facilities to payments architecture –
and soft infrastructure – from the rule of law to
up-to-date codes of conduct and effective regulatory
This infrastructure must be overhauled now that the economy
is on the cusp of the fourth industrial revolution and our
demographic challenges are intensifying. And rebalancing of the
global order is proving as dramatic as it was in Montagu
Such profound changes demand a new finance. And a new
finance demands a new Bank. Let me set out how we are
The drivers of the new finance
a) The new UK economy
The economy is reorganising into a series of distributed
peer-to-peer connections across powerful networks –
revolutionising how people consume, work and communicate.
The nature of commerce is changing. Sales are increasingly
taking place on-line and over platforms, rather than on the
high street. Intangible capital is now more important than
physical capital.7 Data is the new oil.
We are entering an age when anyone can produce anything
anywhere through 3-D printing, where anyone can broadcast their
performance globally via YouTube or sell to China whatever the
size of their business via Tmall.
In a hyper-connected, capital-light world, the future may
increasingly belong to small and medium-sized firms, with
platforms (such as taskrabbit, Amazon, Etsy, Shopify, and
SamaHub) giving them direct stakes in local and global
The financial implications of these developments are only
beginning to be realised, but they are likely to be immense. In
anticipation, the Bank is already creating the new hard and
soft infrastructure that the new finance will require.
For example, the Bank of England is in the midst of an
ambitious rebuild of the Real Time Gross Settlement (RTGS)
system – the backbone of every payment in the UK.
There are three ways the Bank's new RTGS will provide a
platform for private innovation. Each will make it easier for
people to plug in and pay, even across borders.
First, RTGS is being re-built so that new private payment
systems, including those using distributed ledger, can simply
plug into our system. Our new, hard infrastructure will be
future-proofed to your imaginations, opening up a range of
potential innovations in wholesale markets, and corporate
banking and retail services.
We have just opened up direct access to RTGS to a new
generation of non-bank payment service providers (PSPs). No
longer will access to central bank money be the exclusive
preserve of banks.
Several non-bank PSPs, focused on retail and corporate
services, are applying currently. The electronic money flowing
through their systems will become more like its physical
relative. Electronic payments are becoming instantaneous by
using QR codes or mobile phone numbers. Checkout can be
eliminated. The customer, not cash, will reign supreme.
Second, RTGS is being re-configured to lower the excessive
costs of cross-border payments. To this end, two private PSPs
joined earlier this year.8 In parallel, the Bank is
working to connect RTGS and the systems run by other central
banks. And we have just begun collaborating with the Bank of
Canada, the Monetary Authority of Singapore and several
private-sector firms to improve inter-bank cross-border
payments, including initiatives based on distributed
The potential returns are large. At present, cross-border
payments can cost ten times more than domestic
ones.9 We estimate that in the UK alone there is
scope to realise annual savings of over £600 million.
Most fundamentally, the more seamless are global and domestic
payments, the more UK households and businesses will benefit
from the new global economy.
Third, as we overhaul RTGS, the Bank is making it easier for
the UK financial system to realise the promise of big data.
The new RTGS will capture much richer data on every payment
made in a format that defines international best practice. The
Bank is currently consulting on how to do this, including on
the desirability of embedding the best corporate identifier,
the Legal Entity Identifier (or LEI), in RTGS and all the UK's
main payment systems.10 This will improve access to
the domestic and global financial system, support greater
choice and competition for corporate end-users, and advance
anti-money laundering and combating the financing of terrorism
The Bank is also ensuring our rules and regulations
– or soft infrastructure – are fit for the
We have streamlined our approach to authorising banks to
make it easier for banks with innovative business models to be
approved. Since 2013, 37 banks have been authorised, of which
16 are new UK bank start-ups and four are internet-only.
With the FCA we're are exploring how artificial intelligence
and machine learning could be used to make the reading of our
rulebooks easier, the reporting of regulatory data quicker and
the analysis of that data more efficient.
And the Bank is thinking through how regulation may need to
change with the investment needs of the new economy, including
new approaches to risk models and secured lending in a world of
intangible capital and data-based finance.
b) The new world
As the UK economy changes, the world is being reordered.
Over the past quarter century, emerging economies' share of
global activity has risen from 40% to 60% and their share of
global trade from one fifth to one third. Yet at present, their
financial assets make up only 10% of the global financial
This will quickly change. As emerging market economies
continue to open up, their share of global financial assets
could treble to around a third by 2030.
Maintaining the UK's share of cross-border capital flows
during this process could plausibly increase the balance sheet
of our financial sector we host from the current 10 to 15 times
GDP by 2030. This will significantly boost UK prosperity
– provided the associated risks of such an open system
are managed responsibly.
Responsible openness rests on three pillars. The first is
strong global standards. The UK has been at the
forefront of G20 reforms to create a global financial system
that is safer, simpler and fairer. Implementation is now being
regularly assessed and transparently reported by the FSB and
This second pillar is deep supervisory cooperation.
To manage cross-border challenges to financial stability,
international authorities must share relevant information and
work together. As the home to four, and host to the other 26,
globally systemically important banks, the Bank of England
participates actively in all major supervisory colleges,
sharing information and expertise gained from overseeing the
multitude of complex risks unique to London. We expect the same
from those whose firms operate and take on large risks here.
The PRA's open, cooperative approach to supervision means
wholesale activity in London can remain globally-integrated and
highly efficient, without compromising
The third pillar of responsible openness is ending too
big to fail. With enhanced resolution powers and planning,
the Bank of England now has the ability to resolve failing
banks. The UK's major banks are on track to complete this year
the ring-fencing of their critical domestic high-street
businesses from their riskier wholesale activities. And they
already hold loss absorbing resources of 25% of their
risk-weighted assets against a 2022 requirement of 29%. As a
consequence of this progress, market discipline is returning,
with the public subsidy enjoyed by the largest banks having
fallen by 90%.
Now is the time to reap the benefits of these enormous
efforts. Platforms are being created for deference to each
other's approaches when they achieve similar outcomes. With the
three pillars in place, an open, resilient global financial
system is possible.
The pillars underpin the government's new Global Financial
Partnerships Strategy. The Bank of England will be particularly
engaged in deepening our supervisory cooperation with major
emerging economies and will continue to develop the
infrastructure to support cross-border capital flows in their
With respect to the EU, the Bank remains of the view that an
ambitious future financial services relationship, founded on
commitments to achieving equivalent outcomes and supervisory
cooperation, remains both feasible and in the interests of the
UK, Europe and the world.
The future economic and security partnership with the EU is
for the government to negotiate and Parliament to approve. The
Bank's role is to manage risks associated with the Brexit
process and to provide technical support to the government as
In this context, HM Treasury and the Bank are aligned on the
importance of maintaining the high regulatory standards
required by the world's most important and complex
international financial centre. And we are both committed to
responsible openness because it allows capital to move freely,
efficiently and sustainably between jurisdictions and that
supports trade, investment and jobs in the UK, Europe and the
rest of the world.
More broadly, building on the progress already made,
financial services could serve as a template for broader
services trade liberalisation. Taking this high road could help
solve the problem of persistent trade imbalances. Bank of
England research suggests that reducing restrictions on
services trade, to the same extent as those on goods have been
lowered over the past couple of decades, could reduce excess
global imbalances by close to one half.
Global partnerships also mean taking care of the global
commons. In Paris in 2015, 195 global leaders committed to
curbing carbon emissions to limit the rise in global average
temperatures to 2 degrees, and now many governments, including
the UK with its new Clean Growth Strategy, are taking the
necessary policy actions.
In response, the private sector is recognising that
financing the transition to a low carbon economy will be a
major opportunity. On some estimates, this transition could
require investments in infrastructure, equivalent to $6
trillion per year through to 2030.
Investment on this scale cannot be financed in niche
markets. It must be mainstream and global. The City is showing
the way by driving better disclosure of climate-related risks
and opportunities and leading the underwriting of green
The City is showing the way. UK firms, including all of the
largest banks, are driving better disclosure of climate-related
financial risks and opportunities. They join global financial
institutions responsible for managing $80 trillion of assets
– equivalent to annual global GDP – that are
now publicly supporting the G20's Task Force for
Climate-related Disclosures (TCFD).12 And the City
is leading the underwriting of local currency green bonds,
where annual issuance could range in the hundreds of billions
For its part, the Bank of England has helped catalyse the
private sector's TCFD. We are working closely with the People's
Bank of China to build domestic and cross-border markets to
finance the transition to a low carbon economy. And we are
coordinating with fellow central banks and supervisors
representing more than a third of global output and emissions
to develop supervisory approaches to ensure the financial
system is fit for the transition
c) The new demographics
As the world is changing it is ageing. The ratio of the
population aged over 65 to those of working age in advanced
economies has increased from 15% in 1950 to 30% in 2015, and is
projected to rise to 50% over the next twenty years. Over the
same period, this ratio is projected to double to over 25% in
The macroeconomic consequences of these shifts are already
evident, with the large, rapidly growing pool of retirement
savings depressing interest rates and pushing up asset
The need to manage this growing pool of savings will drive
further growth in the wealth management, insurance and pension
industries. And it will require new products, for example to
meet the unpredictable costs of long-term care.
In the process, market-based finance, which has already
accounted for almost all corporate credit growth since the
crisis, will become even more important.
Seizing the full potential of market-based finance requires
the right soft and hard infrastructure for continually open
markets. Hard infrastructure like resilient CCPs. Soft
infrastructure like the regulation the liquidity management of
funds that offer daily liquidity while investing in highly
illiquid underlying assets.
In particular, it requires hard infrastructure like a robust
Bank of England balance sheet that can support the banking
system and the broader system of market-based finance.
The Bank's new approach can be summarised in four words:
we're open for business. We now provide liquidity against a
wider range of collateral, to a wider range of counterparties,
for longer terms, and at lower fees than ever before. And we
stand ready to provide liquidity in a range of foreign
currencies if required.
This new approach was tested during the EU referendum. It
passed. With hundreds of billions of pounds of pre-positioned
collateral and regular, flexible and widely accessible Bank of
England liquidity auctions, markets stayed open and price
discovery was smooth and effective.14
Today marks a step change in our ability to provide the
liquidity that the new finance may eventually require.
With the Chancellor's announcement tonight of a
ground-breaking new financial arrangement and capital injection
for the Bank of England, we now have a balance sheet fit for
purpose and the future.15 One that reflects the
Bank's much wider range of responsibilities including banking
supervision, macro-prudential policy and resolution. And the
framework enhances our independence, transparency and
The additional capital will significantly increase the
amount of liquidity the Bank can provide through
collateralised, market-wide facilities without needing an
indemnity from HM Treasury to more than half a trillion
pounds.16 This lending capacity would expand to over
three quarters of a trillion pounds when, as designed,
additional capital above the target level is accrued through
The new framework will also strengthen the Bank's ability to
fulfil its monetary stability remit.
In August 2016, the MPC launched the Term Funding Scheme
(TFS) in order to reinforce the pass-through of the cut in Bank
Rate to 0.25% to the borrowing rates faced by households and
companies. The Bank required an indemnity from HM Treasury for
the loans it extended under the TFS.17
Today's announcement increases the amount of risk the Bank
can carry on its balance sheet. As a result, the Bank plans to
bring the £127 billion of lending extended through the
TFS onto our balance sheet by the end of 2018/19 the financial
year. The additional capital means the MPC could, if necessary,
re-launch the TFS in future on the Bank's balance sheet,
cementing 0% as the lower bound.
Bringing the TFS onto the Bank's balance sheet next year
will mark the first step in winding down the Bank's Asset
Purchase Facility (APF). After the TFS has been transferred,
the APF will fall to £445 billion – the value of
the government and corporate bonds purchased by the MPC as part
of its Quantitative Easing programme.
The MPC updated its guidance today on unwinding its asset
purchases. Previously, the Committee had noted that it would
not begin reducing the stock of assets until Bank Rate had
reached around 2%. That reflected the MPC's preference to use
Bank Rate as the primary instrument for monetary policy and its
desire to have sufficient scope to cut Bank Rate materially
– relative to the effective lower bound on Bank Rate
of 0.5% at that time – if necessary to respond to
Although the principles guiding the MPC's choice of
threshold still hold, with the lower bound on Bank Rate now
permanently close to 0%, the MPC views that the level from
which Bank Rate can be cut materially is now around 1.5%.
Reflecting this, the MPC now intends not to reduce the stock
of purchased assets until Bank Rate reaches around 1.5%.
Any reductions in the stock of purchased assets will be
conducted over a number of years at a gradual and predictable
pace. The MPC continues to view sales and reinvestment
decisions as equivalent from a monetary policy perspective.
While any reduction will be solely a decision for the MPC based
on meeting its objectives, the Bank will liaise with the Debt
Management Office ahead of implementing any change in its asset
As asset purchases unwind, decisions on Bank Rate will take
into account any impact of changes in the stock of purchased
assets on overall monetary conditions in order to achieve the
inflation target. In the event that potential movements in Bank
Rate were judged insufficient to achieve the inflation target,
the reduction in the stock of assets could be amended or
The Bank is minded to continue to use a variant of the
current floor system19 to control short-term
interest rates as the stock of purchased assets is reduced,
with the Bank meeting banks' demand for central bank reserves
in full at Bank Rate.
The assets purchased by the MPC are currently indemnified by
HM Treasury. Once the APF has been unwound, the Bank will
decide what assets to hold to back its liabilities.
There is, for example, a strong case for holding some longer
maturity assets, such as gilts, outright to back the stable
portion of demand for banknotes. Indeed the Bank had made this
intention clear and already started to do this prior to the
crisis. The overall size and composition of the Bank's balance
sheet will be determined by private demand for reserves under
the floor system, what is needed to support efficient market
functioning and the financial arrangement between the Bank and
HM Treasury under the Memorandum of Understanding published
earlier today. Over time, the Bank expects to learn more about
the demand for reserves, and hence the likely size of its
balance sheet in the medium term, including through engagement
with market participants.
New infrastructure for a new world
The Bank recognises that a new economy, a new world and new
demographics demand a new financial system.
That's why we are building the infrastructure so that UK
households and businesses can transact anywhere, anytime with
anyone whether around the corner or around the world.
That means connections between small businesses in
Scunthorpe and their clients in Shanghai and between households
in Belfast and firms in Bangalore. We now have a balance sheet
fit for a new world order with greater reliance on markets in a
wider range of reserve currencies. That means connections
between banks, investors and markets around the world
consistent with the City's traditional global role.
Having put in place the pillars of responsible, open
financial system, we are ready for deeper Global Financial
Partnerships with the emerging economies that will be the most
important drivers of global growth in the decades ahead. It is
in this context of a confident, open and forward-looking City
that the government's discussions with Europe will take
Unlike a century ago, the Bank's "policy" won't be handed
down to an unquestioning City. The new finance will develop for
the new economy, not in isolation from it. While we prepare for
great change, we will be guided by one constant: our mission to
promote the good of the people we all serve.
I am grateful to Clare Macallan, Alice Carr and
James Benford for their assistance in preparing these remarks,
and to Nathanaël Benjamin, Andrew Hauser, Carsten Jung,
Cordelia Kafetz, Tom Mutton, and Rhys Phillips for background
research and analysis.
This article has been adapted from The Mansion House
speech, given by Mark Carney on June 21 2018. The full and
original speech can be freely accessed at www.bankofengland.co.uk/speeches.
1. Employment and tax data is from "Total tax contribution
of UK financial services, Tenth edition", City of London
& PWC, November 2017. Lending data from Bank of England
statistics and calculations.
2. The global FICC Market Standards Board (FMSB) is
developing readily understood standards for their markets.
And the global FX Committees have published the FX Global
Code, the first globally consistent code of conduct for FX
3. Brunt, L (2006), 'Rediscovering Risk: Country Banks as
Venture Capital Firms in the First Industrial Revolution',
The Journal of Economic History, Vol. 66, No. 1, pages
4. Mokyr, J (2009), 'The Enlightened Economy: An Economic
History of Britain 1700-1850', Yale University
5. Hughes, J and MacDonald, S (2002), 'International
Banking: Text and Cases', Pearson.
5. Mokyr, J ibid.
6. Schenk, C (1998), 'The Origins of the Eurodollar Market
in London: 1955 – 1963', Explorations in
Economic History, Vol. 35, Issue 2, pages 221-38;
McGuire, P (2004), 'A Shift in London's Eurodollar market',
BIS Quarterly Review, September 2004; Hughes and
MacDonald (2002) ibid.
7. In the UK, intangible investment rose above tangible
investment in the early 2000s, and stood at 11% as a share of
output in 2014 compared with 10% for tangible investment.
Investment in intangibles also exceeded that in tangibles in
the US, Sweden and Finland [on average over 1999-2003], but
not in other European countries including German, Italy and
Spain. See Haskel, J and Westlake, W (2017), 'Capitalism
Without Capital: The Rise of the Intangible Economy',
Princeton University Press; and Goodridge, P R, Haskel, J and
Wallis, G (2016), 'Accounting for the UK Productivity Puzzle:
A Decomposition and Predictions', Economica, Vol. 85, Issue
8. In April 2018: https://
9. McKinsey World Payments Map (2016).
10. The G20's LEI, which originated as a risk management
tool for the financial sector, standardises identities for
companies. See https://
11. See the Bank of England's Policy Statement 3/18,
'International banks: the Prudential Regulation Authority's
approach to branch authorisation and supervision'.
12. The financial sector supporters included 20
globally-systemic banks, 8 of the top 10 global asset
managers, the world's leading pension funds and insurers, the
largest sovereign wealth fund and the two dominant
shareholder advisory service companies.
13. See '[De]Globalisation and Inflation', 2017 IMF Michel
Camdessus Central Banking Lecture given by Mark Carney, and
Rachel, L and Smith, T (2015), 'Secular drivers of the global
real interest rate', Bank of England Working Paper No. 571.
For a contrary take, see Goodhart, C and Pradhan, M, (2017),
'Demographics will reverse three multi-decade global trends',
BIS Working Papers No. 656.
14. In the run-up to the vote, the Bank undertook
extensive contingency planning which included encouraging
banks to pre-position enough collateral in our facilities to
enable them to draw down up to £250 billion in
liquidity. The combination of this war chest and coordinated
G7 central bank action helped ensure markets functioned
normally as the system absorbed a result that had been
assigned a 10% probability hours before. And it meant we
could credibly communicate to the public that we were well
prepared for the result.
15. See https://
16. The exact amount that can be provided will depend on a
range of factors, including the type and amount of
collateral, the currency composition of the lending and the
concentration to individual counterparties.
17. See https://
18. For more details, see the box on page 34 of the
November 2015 Inflation Report.
19. See https://