Three ways the banking sector can support the growth economy

Growth is often discussed in terms of investment, productivity and innovation, but the banking sector underpins each of these. The ability of banks to provide finance, develop new products and adopt new technologies will be influenced by a number of policy and regulatory decisions in the coming years. Improved liquidity, growth of digital assets and use of AI are three areas where those decisions could have a significant impact.

In conversation with Bob Wigley, Chair of UK Finance

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Releasing capital to support investment

While managing liquidity remains a prudential priority, reducing capital requirements could release resources to support growth in the UK economy, without impacting financial stability. This could support additional lending, investment in new products and expansion into new markets. The Financial Policy Committee has indicated that there is scope for a modest reduction in capital requirements, but it is now up to the Prudential Regulation Authority to determine how those changes are reflected at individual firms.  

Smaller challenger banks feel these constraints most acutely. With fewer resources than larger firms, challenger banks often have less flexibility to absorb regulatory costs or deploy capital into growth initiatives. As such, capital requirements have a significant on influence on product development, lending strategies and expansion plans, sometimes leading institutions to prioritise capital efficiency over market opportunity. A more proportionate approach could allow all banks to expand lending activity and invest in new products, while boosting competition.  

Digital assets and market innovation

Tokenisation is emerging as a key growth area for the financial sector and presents a significant opportunity for UK growth. Used effectively, tokenisation could reduce pressure on resources by cutting transaction and settlement times, while reducing the associated administrative costs. The benefits are already apparent through a recent mortgage pilot, where purchases were settled using tokenised deposits and a smart contract. This allowed funds and ownership to transfer automatically once the agreed conditions had been met.

The UK is well positioned to become a global leader in the tokenisation of real-world assets, supported by a strong regulatory framework and deep capital markets. To maintain that advantage, the legal and regulatory framework will need to continue evolving to accommodate digital assets and give firms the confidence to innovate safely. Much of the regulatory focus to date has understandably centred on stablecoins, particularly where their use for payments could have implications for consumers and financial stability. Attention is now broadening to the wider tokenisation of real-world assets, where greater regulatory clarity will be important in helping firms move from pilots towards wider adoption.

While stablecoins are undoubtedly useful tools, central bank-backed digital currency could offer wider opportunities for innovation in the longer term. Prioritising their development could give the UK a first mover advantage, positioning it as a global market leader and boosting competition. The government's planned issuance of a digital gilt, expected early next year, represents an important step in building capability and market confidence in this area.

Industry and regulators will also need to work closely together to develop an appropriate framework for digital assets. A digital sandbox can provide a safe environment to test use cases, identify risks and gather practical learnings that can help shape future regulation. This process is still developing, but it offers an opportunity to create a robust yet proportionate framework that supports innovation while maintaining market integrity. 
This would also give an opportunity to explore a wider range of use cases, for example during insolvency cases. In these instances, smart contracts could offer clearer identification of assets and make it easier to determine how funds should be distributed. Until the UK's digital asset framework is fully established, advisers must continue to rely on existing legal principles and precedent.

Use of technology and AI

Emerging technology and AI is also pivotal in supporting the UK’s growth economy, by improving efficiency and freeing up capital for further investment. It’s now widely used in areas such as credit assessment, risk modelling and operational efficiency, and is giving challenger banks and fintechs greater ability to compete across the sector. However, less than one in five banking leaders are confident in their AI governance frameworks.

As such, regulators are placing greater emphasis on how AI-driven decisions are governed, monitored and explained, particularly where technology influences customer outcomes. For banks, the challenge is ensuring that the decisions it supports can be understood, justified and subject to appropriate human oversight. Realising the benefits of AI will depend not only on investment in technology, but on firms being able to explain, oversee and ultimately take responsibility for the decisions it supports.

Investing in growth

Capital reform, digital assets and AI governance all require a co-ordinated approach between government, regulators and industry to drive growth across the UK. Changes in political priorities or regulatory timetables could slow progress in areas where firms are already making investment decisions.  For challenger banks and specialist lenders in particular, delays to reform can slow growth plans, reduce investment confidence and postpone the rollout of new products and services.

The debate for policymakers is therefore less about the direction of reform than the pace and extent of delivery, and how to support economic growth without weakening prudential standards or consumer safeguards.

Successfully delivering these reforms will help ensure banks have the confidence, capacity and tools needed to support investment and innovation across the economy. For firms, the practical impact will ultimately depend on how reforms are implemented and the extent to which they provide greater certainty for future investment and innovation. 

For more information on any of the issues discussed in this article, please contact Alex Ellerton, or Chris Laverty.