Removing Frictions − speech by Nathanaël Benjamin

Speech

It is such a pleasure to be with you today here in Newcastle. Big thanks to the North East Chamber of Commerce for hosting me.

I will talk about the critical link between financial stability and economic growth. And the important role the financial system plays in supporting innovation and productive finance. I’ll be sharing the Financial Policy Committee’s (FPC) latest recommendations – which we published just yesterday – on how the UK’s financial sector can better support sustainable economic growth.^{footnote [1]}

I lead the financial stability directorate at the Bank of England and serve as a member of the FPC. You might be wondering why someone from the Bank of England, whose primary objectives are monetary and financial stability, is speaking to you about growth – so let me explain.

The role of financial stability in growth

Financial stability is a means to an end, not an end in itself. The reason we care about it is that it is indispensable for economic welfare, of which long-term growth is an important aspect. And supporting economic welfare is the ultimate timeless mission of the Bank of England, as set out in our founding charter of 1694 and still in force to this day, which is to “promote the good of the people of the United Kingdom” by maintaining monetary and financial stability. Put simply, there cannot be sustainable growth over the medium-to-long term without financial stability.

Financial stability makes the UK an attractive place to do business for international investors. And it supports UK firms’ ability to compete abroad. Higher investment by businesses and saving by households increase the capital available for projects that improve productivity growth. Also a stable financial system supports lower risk and term premia. In turn that lowers the cost of borrowing and improves incentives to fund long-term productive investment.

All this contributes to a reliable and predictable economic environment, which provides companies, customers, and counterparties with reassurance that they can do business here safely and with confidence. These factors all facilitate the investment that drives long-term growth. And the benefits of a strong domestic financial system are even more pronounced when global risks and uncertainty are elevated. You can find more detail on the FPC’s assessment of global risks in the Financial Stability Report (FSR) we published yesterday.^{footnote [2]} Against a backdrop of heightened global risks and fiscal pressures, a strong financial system becomes even more important since it can help the economy through turbulent times.

So those are the benefits of financial stability. The thing is when you have it you don’t realise, people just take it for granted. But when you don’t have it, everybody notices. And then as time goes by, memories fade and people tend to forget the costs of instability. The Global Financial Crisis (GFC) of 2008 is a stark example of these costs. Financial crises don’t just make us worse off in the moment. They leave deep scars on the growth potential of an economy. They tighten credit conditions, suppress investment, and distort capital allocation. The cost of the GFC was staggering, and there was a very persistent slowdown. It took 5 years for GDP to recover to its pre-crisis level. Crises disrupt essential financial services, reduce fiscal space, increase pressure on public finances, and cause significant economic hardship to many households – in ways that cast a very long shadow still lingering to this day. While pre-crisis growth may not have been fully sustainable, the scarring from the crisis played a major role in the weak growth that followed.

The role of growth in financial stability

We can all agree that financial instability is best avoided!

But conversely, equally important is the role that growth plays in supporting financial stability. Strong economic performance supports corporate earnings, employment and investment, and government finances. All of this makes actors in the real economy more resilient. And in turn low loss rates on banks’ books support their capacity to lend further to households and businesses. Conversely, evidence suggests that persistently weak economic demand may create an environment that pressures financial firms to take more risks than they would otherwise deem reasonable or sustainable, as they seek to increase returns on investment. Sometimes responding to short-term investor pressure by “picking up pennies in front of a steamroller”.

Productivity is a crucial driver of economic growth. But over the past 15 years, productivity growth in the UK had been low by historical standards and relative to some other advanced economies. Between 1997 and 2002 UK growth in GDP per hour worked averaged 3%. Between 2003 and 2007 it was 1.6%. Between 2010 and 2019 it dropped to 0.6%. And between 2020 and 2023 it hovered around 0.9%.

Not great.

The benefits of higher productivity are wide-ranging. As firms become more productive, they can expand operations, enlarge their revenue base, undertake more investment, innovate, and employ people. Improvements in overall productivity growth can also ease fiscal pressures and in turn support the resilience of government bond markets. For example, participants in these markets, many of which are increasingly prepared to dip in and out of positions, watch economic growth projections closely to judge how much they (as investors) are willing to charge governments to borrow. In turn, the cost of government borrowing affects the costs and availability of borrowing for households and businesses, and their ability to access financial services.

So improving productivity in the UK is essential to support economic growth, and in turn financial stability. Because it ultimately supports the resilience of systemic markets, of households, and of businesses.

The financial sector’s role

Productivity growth is determined by a very broad range of factors beyond finance, such as trade conditions, scientific and technological innovation, and human capital. But the financial sector also has an important role to play. It provides services to UK households and businesses – such as lending, saving, insurance, and payments – that enable transactions, risk management, and investment. In particular, the sector provides financing solutions for investment in capital and technology that underpin innovation, technological progress, and in turn productivity improvements.

When these services are disrupted, for example due to frictions in the system – ‘sand in the gears’ – the financial system will not be fulfilling its role of serving households and businesses as efficiently as it should. This will get in the way of productivity improvements, hold back economic growth, and ultimately be unhelpful for financial stability.

The role of the FPC

Given the importance of the financial system for both stability and growth, what is the FPC’s role?

Our goal is to ensure that the financial system provides vital services to households and businesses in all circumstances, both good times and bad. The most important thing we can do to support growth is to ensure financial stability.

One way we do this is by identifying, monitoring, and addressing systemic risks. By that we mean the risks that affect the functioning of the financial system as a whole, not just individual institutions. Just as you would purchase insurance to protect your home or business from unexpected shocks, the FPC works to ensure the system as a whole has the resilience needed to withstand stress and help the economy through it.

For example, we run stress tests and exploratory scenario exercises to ensure banks, insurers, and key markets can withstand shocks and self-stabilise without cutting lending or amplifying stress. Our latest bank capital stress test results show that banks continue to be strong enough to do that.

Actions taken since the Global Financial Crisis have significantly strengthened system-wide resilience. Despite multiple shocks in recent years, UK households and corporates have been resilient so far, and the financial system has been able to continue to lend and support them during these shocks. Let me bring this to life with a couple of examples:

• About half of owner-occupied mortgages currently in arrears were originated before the 2008 crisis, when today’s regulations and standards were not in place. And the yearly average number of repossessions – so people losing their homes – between 2014, when measures to control the sustainability of lending in the housing market were implemented, and 2019 were 76% lower than over the preceding 26 years.
• During the Covid-19 pandemic, lenders offered mortgage payment holidays for up to six months. Take up of that offer peaked at nearly 1.9 million households. It’s only because banks had become strong enough that they could afford to do that.

We also review our measures and policies to build resilience to ensure they remain effective and proportionate as the financial system evolves. So that we achieve the optimal amount of resilience at minimum cost. Recent steps include:

• Reducing the frequency of our main bank capital stress tests to every other year, thereby reducing the burden on banks considerably.^{footnote [3]}
• Recommending amendments to the implementation of the FPC’s loan-to-income (LTI) flow limit to allow flexibility for individual mortgage lenders to increase their share of lending at high LTIs while ensuring the aggregate flow remains consistent with the limit of 15%.^{footnote [4]}
• Updating our assessment of optimal bank capital requirements. We have just cut our key benchmark for the appropriate overall level of bank Tier 1 capital requirements from 14% to 13% of risk-weighted assets. Because some banks are now less systemically important, balance sheets have changed, and risk measurement has improved (including as we implement the international bank capital standard, Basel 3.1). And we’ll be actively considering feedback we’ve received on interactions, proportionality, and complexity in several areas of the capital framework, including on buffer usability, the implementation of the leverage ratio, and considering how capital requirements related to domestic exposures interact.^{footnote [5]}

Beyond building resilience in times of stress, the FPC is also concerned with frictions in normal times. The sand in the gears that gets in the way of the efficient flow of financial services. Frictions can be regulatory or structural factors that make it harder than it should be for firms to provide or receive credit or services. Our goal is not only to prevent disruption during shocks but also to ensure the system can allocate resources and share risks efficiently in good times.

The Chancellor’s remit letter

A year ago, with the FPC’s objectives in mind, the Chancellor of the Exchequer asked the FPC to evaluate in 2025 where the financial sector could better contribute to sustainable economic growth, without undermining financial stability.^{footnote [6]}

The FPC agreed that its work on growth in 2025 would focus on identifying barriers to the provision of credit and financial services to households and businesses. In particular, to companies with the greatest potential to contribute to improvements in the country’s productivity growth. And we considered solutions to these challenges – what can be done to grease the wheels.

To identify these barriers and solutions, we engaged – in collaboration with the government – with over 50 financial sector, government, and academic groups to further understand the challenges that high-growth^{footnote [7]} firms may face in contributing to sustainable growth. We also conducted a deep dive into the existing literature to understand the financing barriers that these firms face.^{footnote [8]} Personally, I have found my regional visits to businesses across the country, including via the local contacts of our agency networks, particularly insightful in really getting to the bottom of those challenges, and to generate ideas to address them. The engagement from businesses has been terrific, and we’re very grateful for it.

Through this work, we agreed on three priority areas. We selected these as they are directly related to the FPC's remit: as we went through the range of frictions and barriers in the provision of vital services and credit to the real economy, we judged these three to be particularly material:

1. Barriers faced by pension funds and insurers in supporting long-term capital investment in the UK economy. We chose this because investment by insurers and pension funds can provide stable sources of capital that are needed to improve the infrastructure that supports wider economic activity, the development of new technologies, and the expansion of the most productive firms.
2. Challenges for high-growth firms in accessing finance as funding rounds scale up. That is because these firms make an outsize contribution to employment and growth, to innovation, and to the deployment of new technologies and business models.
3. The responsible adoption of innovative technology across the financial sector. We have focused on this because responsible adoption of innovative technology – such as artificial intelligence (AI) and distributed ledger technologies (DLT) – has the potential to reshape productivity growth by bringing significantly greater efficiencies and harnessing new technological developments.

Let me now outline some of the frictions or barriers in these areas, and our recommendations going forward.^{footnote [9]}

Recommendations

So, what do we recommend - and why?

Investment of long-term capital into assets which increase the productive capacity of the economy, including to high-growth firms.

Challenge

There is growing need in the UK for more long-term investment capital to tackle challenges like climate change, infrastructure improvement, the development of innovation, and the deployment of new technology. More investment from insurers and pension funds – who are natural long-term investors – would give businesses stable funding while offering better asset returns.

Yet, compared to their international peers, UK insurers and pension funds invest relatively little in UK productive assets such as infrastructure, property, and private equity – who themselves are key investors in larger high-growth firms. Let’s take investment in private equity firms as an example. They are key providers of ‘patient’ long term investment capital that has the potential to benefit long-run economic growth. Indeed, there’s much international evidence that suggests businesses financed via private markets, including private equity, demonstrate higher levels of productivity, with investment increasing after private market involvement. But analysis by New Financial and the Purposeful Company shows that pension funds in Canada, Finland, the US, Taiwan, New Zealand, the Netherlands, Denmark, South Korea, and Australia allocate a greater proportion of assets to private equity than UK pension funds. UK funds allocate 6% to private equity, for Canada it is over 20%. The synergy between pension funds or insurers and private equity makes sense intuitively, although it needs to be exploited safely, as discussed in our FSRs. And finally in terms of international comparison, research shows that just 22% of UK workplace DC pension assets are invested domestically, compared to 44% in New Zealand and 55% in Australia.

A key barrier to additional investment into assets that support productivity is that UK defined contribution pension funds are often small and lack scale, limiting their ability to invest in riskier, higher-return assets. This preference for safer assets limits their ability to make long-term investments in the UK economy. Insurers also report that there are few domestic opportunities that align with their expertise and meet their risk and return requirements.

Solutions

One way to address these challenges is to make defined contribution (DC) pension funds larger and more sophisticated, which would help reduce costs. The Government’s Pension Schemes Bill supports this by encouraging consolidation, merging smaller DC schemes into larger, better-managed funds. DC pension products could also be redesigned to reduce the need for daily liquidity requirements and enable greater pooling of risk through fund-of-funds or securitisation. All this enhances pension funds’ investment firepower by removing the cost inefficiencies that come with fragmentation.

Raising awareness among pension funds and insurers about the opportunities in venture and growth finance – including the role of public-private partnerships – could also unlock new investment. Finally, further research to understand behavioural and regulatory barriers that prevent domestic capital from flowing into high-growth firms can help ensure obstacles are addressed effectively.

Regulatory changes are supporting UK insurers to innovate in their investments. In the view of the insurance industry, Solvency UK reforms should support delivery of the UK insurance industry’s commitment to invest at least £100 billion in UK productive assets over the next decade.^{footnote [10]} It is important that this happens. Success depends on the decisions of pension funds and insurers themselves, their investment management policies, and the availability of appropriate investment opportunities.

Further work is likely required to encourage the allocation of pension and insurer assets to high-growth firms. Collaboration between public and private sectors will be needed to identify barriers to that, and to develop solutions that channel investments from defined contributions pension schemes or insurers to funding vehicles for high-growth firms.

And we should ask ourselves the same questions about other investment opportunities which also appear to be natural matches between long-term economic priorities and the long-term focus of insurance and pension funds. For example, in the housing market, housing associations play an important role in unlocking the building of new homes – which itself has a bearing on house prices and therefore first-time buyers’ ability to access the mortgage market. A common theme we hear through our regional visits is that delays in building new homes have often been caused by lack of demand from housing associations in funding the social housing part of new buildings. Is this due to a lack of available funding, and is there a natural match between the long-term focus of insurance and pensions funds and the significant long-term investment need (followed by steady income stream) that characterises housing associations? Could any frictions or inefficiencies here be removed?

The supply of debt or equity finance to high-growth firms including start-ups and scale-ups.

Challenge

Let me now turn to the second area where we are highlighting frictions, which is financing for high-growth firms. When we speak with them, we hear a number of issues.

First, they face growing challenges in accessing domestic finance as funding rounds get larger, especially from domestic sources. While the UK has the third-largest venture capital (VC) market in the world and a growing venture debt market, the level of venture investment per capital lags behind peers. Research by the British Business Bank (BBB) finds that UK VC investment is around 0.7% of GDP, around 10% less than in the US over 2022-24 on a relative basis.^{footnote [11]}

These challenges are compounded by the fragmentation of the UK’s funding ecosystem. There are multiple agencies and schemes, creating a complex, inefficient landscape that SMEs and high-growth firms struggle to navigate.

And whilst a number of banks have their start-up units, in practice locally SMEs often tell us that there simply isn’t a banker for them to talk to. With the closures of bank branches, financing has moved more online and away from traditional relationship methods of local businesses having a local banker whom they view as a long-term partner who knows their business really well. In addition, traditional bank lending can also be less well suited to high-growth firms because, although these firms are either growing rapidly or have the potential to grow rapidly, they have a limited trading history, they are not yet consistently profitable, and they have low levels of the type of collateral that banks would traditionally require as security against the loans.

Many high-growth firms face difficulties in finding assets that lenders want as collateral on which to secure lending.^{footnote [12]} The assets that they often do have, for example intellectual property, are not commonly accepted as collateral due to valuation difficulties, the lack of standardised frameworks for assessing IP risk, and recovery constraints that banks face in case of default.

Likewise, at the other end, financing firms find it hard to identify the right businesses to invest in. When we speak with private equity firms, we hear a clear appetite to invest in the UK – there is obviously capital ready to be deployed. However, many private equity firms struggle to identify effective ways to ensure funds are directed to the right opportunities.

Solutions

There isn’t a single solution to these challenges. But we highlight several things that could help the financial sector provide the breadth and depth of services that high-growth firms require.

One solution may be greater use of public-private partnership funding initiatives to channel financing to SMEs in support of productivity improvements. We can learn from international experience here: Germany’s KfW, provides long-term financing and co-investment to support SMEs and innovation, while U.S. programs, run by the Small Business Administration and the State Small Business Credit Initiative, offer loan guarantees and channel private capital into venture and growth funds. The British Business Bank could build on these international experiences and play an important role in this context, as could the private equity industry. Public-private partnerships are powerful because they share the load and give private investors the confidence to take on bold, long-term projects that they might otherwise shy away from in the absence of the public sector’s involvement and endorsement.

I’m sure you can detect a theme here, as solutions to support financing for high-growth firms also bear similarities with those required to support pension funds and insurers in channelling domestic capital towards long-term domestic investment – which I mentioned previously.

There is also space for additional research and policy work on barriers facing high-growth firms in accessing finance. This includes work to better understand impediments to lending backed by intellectual property (IP), such as a lack of information to value and assess an IP’s value as collateral that will be increasingly needed as the intangible knowledge economy becomes an even more important part of UK growth. An important government initiative in this space is a working group exploring how best to support lending to IP-rich sectors.

The Bank is also working with the Treasury to explore how the ring-fencing regime could be further reformed to allow ring-fenced banks to provide more products and services to UK businesses.

I would also note the relevance here of the announcement in the Autumn 2025 Budget published last week of a new objective for the British Business Bank to mobilise institutional capital at scale, and of a package of measures to support entrepreneurship.

Supporting the responsible adoption of innovative technology by the financial sector.

Challenge

Finally, the responsible adoption of innovative technology in the financial sector is the third area where we are highlighting frictions. In particular two key challenges:

First, the high cost of cyber-resilience. Tech-heavy firms, especially fintechs, face significant costs in protecting themselves against cyber threats. Rising geopolitical tensions and rapid technological advances increase the risk of operational disruptions. Many cyber-attacks have targeted third-party suppliers of larger corporates as a way of penetrating their clients’ systems. As such a potential point of entry for these attacks, it is therefore important that suppliers themselves – a number of which can be fintechs – have robust cyber-defences in place. The costs and risks from cyber-attacks are particularly high for firms that rely on technology as their core business. But the costs and resources required for cyber-defence can prove a real financial and operational headwind for the profitability of small fintechs looking to grow.

The second key friction we highlight in relation to the adoption of innovative technology in the UK’s economy is the need for a modernised UK payment infrastructure. Expensive payment systems are a significant barrier. The UK needs faster, seamless, frictionless, and secure payments to support economic activity. This requires coordinated action and investment to build next-generation infrastructure that drives innovation, competition, and security.

Solutions

Because cyber and innovation risks are complex and evolving, solutions require joint efforts between the financial sector and public authorities. Possible actions include publishing and signposting further information on cyber threats, issuing guidance targeting fintechs looking to build cyber resilience, helping them navigate through what they’ve got to do, pointing them to the right resources, and creating innovation sandboxes to test new digital business models.

Important initiatives in this respect include the National Cyber Security Centre’s work to provide advice and guidance on cyber security for SMEs, and the work of the Cross-Market Operational Resilience Group (CMORG) to develop solutions and share knowledge within the financial sector. Targeted and signposted advice and guidance for fintechs on cyber-defence would be a valuable next step for public and industry bodies.

The Bank is also working with UK authorities and industry to deliver innovation in money and payments through:

• Supporting the government’s National Payments Vision, chairing the newly established Retail Payments Infrastructure Board and expanding Real-Time Gross Settlement (RTGS).
• Delivering practical advancements in the UK’s payments infrastructure by launching the Digital Pound Lab and DLT innovation challenge.
• Facilitating the development and adoption of new forms of digital money. This includes the development with the FCA of a regulatory regime for stablecoins. And working closely with the industry as banks develop proposals for the tokenisation of deposits. Because it offers the advantages of distributed ledger technology as well as the benefits of traditional forms of money such as the deposit insurance provided by the Financial Services Compensation Scheme. Tokenised deposits offer programmability, instant settlement, and customer familiarity.

Conclusion

So let me wrap up here. Growth and financial stability go hand in hand. The most important contribution the FPC can make to growth is to ensure a stable financial system. In addition, we work to implement efficiently the measures that build resilience to shocks as the financial system evolves, by reducing unnecessary regulatory burdens. And on top of that, the FPC also targets frictions that limit the efficient flow of financial services in normal times.

It is our job to worry. But we worry not only about risks and the impact of shocks in bad times but also about not enough risk being taken in good times.

This year, drawing on external engagement and research, the FPC has focused on understanding impediments and identifying opportunities for the UK financial services sector to further support sustainable economic growth.

Given the importance of productivity improvements for growth and in turn financial stability, we focused specifically on frictions in the system that hinder the provision of financial services to areas of the economy that are key to productivity growth: investment in long-term capital from pension funds and insurers; the financing of high-growth firms; and the responsible adoption of innovative technology.

The Bank of England will continue to build on this work, including by monitoring the progress against the issues identified, considering further actions that could support the supply of long-term productive finance, and delivering research on growth as part of its future research agenda.

The public and private sectors, as well as the academic world, all have an important role to play in working with businesses to bring to life solutions to these barriers. These solutions are within reach, and in aggregate they would help the financial sector contribute to unlock a meaningful share of the untapped potential in the UK’s economy.

Thank you.

I would like to thank Christopher Goodspeed, Niamh Reynolds, Katie Fortune, Colm Manning, Richard Button, Rashmi Harimohan, Sudipto Karmakar, Isabelle Roland, David Bailey, Isaac Orszag-Land and Sarah Ashley for their assistance in preparing these remarks.