And when risk taking increases, it must not be at the expense of the resilience of lenders to any future downturn in the economy. They must remain capable of serving in the bad times, as well as the good. Our annual stress test provides the basis for checking that but, in this environment, more regular check-ups are needed too. That’s why (as we said in the Record of our March meeting) we intend to “re-consider the adequacy [of capital levels] in June, with a focus on the evolution of domestic risk appetite.” We’ll keep standards up with the risks that are being taken. Alongside that, we must also keep up with the third macro trend: a fundamental re-shaping of the system. 9  In part due to regulatory efforts to level playing fields, banking is becoming more competitive. Smaller banks are taking market share. In the past 12 months, smaller banks – that account less than a fifth of the outstanding stock of household lending – have delivered half the new lending to UK households (see chart 5). Their newfound importance in the supply of credit means that, even though they are individually small, their collective risk taking has increasing relevance to the whole economy. Collectively at least, smaller banks must – like their bigger cousins – have the resilience to withstand economic bad times. That trend to greater competition should continue as Payment Services reforms and Open Banking come into play.
So the recent political agreement on an implementation period is welcome. There was always going to be an interlude between political agreement and legal certainty. So authorities here have done what our mandate to keep the system capable to serving the economy implies. Regulatory underpinning has been given to the political agreement. European firms can assume they’ll be able to operate in – and serve clients in – the UK, much as they do now, until the end of 2020. 5  5  See update on the regulatory approach to preparations for EU withdrawal, 28 March 2018, at https://www.bankofengland.co.uk/news/2018/march/update-on-the-regulatory-approach-to-preparations-for-eu-withdrawal 5  All speeches are available online at www.bankofengland.co.uk/speeches  5  And that commitment is backstopped. The UK government has committed to legislate, if necessary, to allow European firms to operate and serve end users in the UK temporarily after Brexit. The economy of the UK, at least, can be confident that – whatever happens – it can access financial services as it does now. But still more action is needed because existing contracts could be disrupted. Uncleared over-the-counter derivative contracts, with a notional value of £ trillion, could be affected. That’s around a quarter of derivative contracts entered into by parties in both the UK and EU. Novation of contracts on that scale risks disruption, particularly if it were to take place in a short time frame. As with the flow of new services, a backstop would have benefit. It would need two parts.