While banks in the United Kingdom are now in a much better position to deal with major economic shocks than they were during the global financial crisis in 2007-09, an air of caution remains. In March 2025, the Bank of England warned that economic and trade uncertainty may continue and even intensify throughout the year, putting pressure on financial institutions to prepare for a hike in interest rates.
The announcement came with the decision to hold UK interest rates at 4.5%, as voted by the majority of the Bank’s Monetary Policy Committee (MPC), which sets rates to ensure that inflation stays low and stable. The interest rates remained above the Bank’s 2% target, but Governor Andrew Bailey said that rates were “on a gradually declining path.” Economists also predicted two more rate cuts for the rest of the year, which could influence other UK banks to trim their own rates and reignite economic activity through lower borrowing costs.
However, until then, the rising interest rates will continue to petrify not only borrowers and mortgage payers but also UK banks, whose profitability is affected by inflationary shocks. Financial uncertainty is also compounded by macroeconomic factors that increase trade and credit risk, including the tariffs imposed by the United States and threats of another recession in the UK.
Trump’s tariffs affect the UK’s financial systems
In an attempt to reset global trading relationships, US President Donald Trump imposed a range of tariffs on goods imported from its top allies and trading partners, including the UK. The UK has been hit by a baseline 10% tariff on nearly all goods, with a higher tariff for certain goods like steel and aluminium. This has threatened the stability of UK steel businesses that export across the Atlantic, as they face a 25% tariff on all imports into the US on top of existing duties. Among the businesses most affected by the new charges levied on steel and aluminium is British Steel, whose Scunthorpe plant has been losing around £700,000 a day and struggles to financially support its 2,700 workers, which comprise three-quarters of its total UK workforce. To prevent a major shutdown that could lead to job losses and disruptions in steel production, the UK government has temporarily taken over the plant, but ownership remains with the Chinese company Jingye.
Although government intervention can help alleviate financial losses among key sectors and industries like steel, it’s a different conversation for interest rates. As mentioned earlier, economists have already forecasted interest cuts that can bring borrowing costs down to 3.5% to 4% by the end of the year. However, if Trump’s tariffs continue to push up prices, interest rates might stay at 4.5% for longer and make it more difficult for the Bank to keep the inflation rate at 2%.
Even when rising interest rates can be a boon through higher returns on individual and business loans, they mainly affect banks by weakening economic growth. The Bank’s Financial Policy Committee has already predicted a weaker economy in light of Trump’s tariffs and the subsequent shift in global trade relations. Since the UK’s financial systems are inextricably tied to its macroeconomic performance, a weaker economy amid tariff volatility means confidence among bank investors will wane, ultimately slowing credit growth. Furthermore, despite the FPC maintaining its confidence in UK banks’ ability to sustain households and business borrowers, a looming recession may negatively impact the banking sector’s resilience to withstand economic shocks.
Stagnant growth vs. a possible recession
Economists define a recession as two consecutive quarters of negative economic growth, which was observed in the first half of 2020 when the economy shrank by 2.6% in Q1 followed by an alarming 18.8% in Q2. The UK also experienced a mild recession in 2023, with economic dips reported at 0.1% in Q3 and 0.3% in Q4. While the UK economy, primarily measured through its gross domestic product (GDP), has remained fairly stagnant since then, threats of a recession emerge as Trump’s tariffs indirectly impact the UK’s GDP growth.
To start, being one of the US's allies won’t protect the UK from the shrinking US and global economies and plummeting global stocks. If the US economy enters a recession, the interconnected nature of the UK economy means the narrowly positive growth forecasts for the rest of the year may change. Considering the UK economy shrunk by 0.1% in January, a revised growth forecast following Trump’s tariff regime poses the risk of an economic slowdown.
Fears of a UK recession could also cause a decline in consumer confidence and spending, which then affects banks through reduced loan demand. Bank stocks and earnings have also been hit hard by increased mortgage defaults and delinquencies, as households and businesses struggle with job losses and bankruptcies and thus miss their payments.
However, whether the UK economy experiences a recession or narrowly avoids it, banks will continue to face challenges brought about by stagnant growth. For instance, ‘stagflation’ may occur, in which monetary policy is unable to keep inflation at bay and elevates unemployment rates. High unemployment rates may then indicate a decrease in loan portfolio quality, making it more challenging for banks to provide loans and make financial gains on returns and low default rates.
UK banks turn to financial solutions and frameworks
The banking sector is an essential part of the UK economy, mainly because it safeguards assets and stimulates economic activity through loans, which is especially crucial during inflationary periods. As such, banks are expected to send financial and non-financial information to governments and other regulatory bodies. Ensuring transparent and accountable processes can maintain the stability and integrity of financial systems.
Given the multiple economic factors that could hinder the UK banking system’s growth and sustainability, the Bank of England and other UK banks are tapping into innovative financial solutions to mitigate these risks and maintain resilience. Despite fears of an economic slowdown possibly affecting financial performance and regulatory compliance, UK banks are leveraging digital transformation to address financial risks and challenges. A digital regulatory reporting solution simplifies financial management for banks of all sizes and scales to stay consistent with their data analysis and reporting. Even when regulations change to keep pace with volatile market conditions, an integrated solution suite for finance, risk, and regulatory compliance can analyse ongoing regulatory changes and report to multiple regulators.
Banks like BBVA’s subsidiary in the UK have adopted Wolters Kluwer’s OneSumX solution, which saves time and resources by automating workflows for regulatory compliance and reporting. In addition to ensuring its financial services are aligned with its UK obligations, the investment bank company also uses the tool to manage liquidity risks. This is made possible by OneSumX’s ability to process large data volumes and provide a holistic view of an institution’s financial risk profile. By connecting critical data like market trends and credit factors across an enterprise, the platform can ultimately help banks enhance analytics and make data-driven risk management decisions.
Additionally, UK banks can rely on risk management frameworks like Basel III, which the Bank of England implemented in 2024 to emphasise resilience and risk mitigation in the country. As an updated global framework for international banking regulations, Basel III promotes financial stability by standardising minimum capital requirements across Basel-compliant countries, including the UK. There is also an extra buffer capital requirement that banks can use to enhance their resilience against economic shocks like a recession.
Basel III also introduced the use of liquidity coverage ratios, which mandate banks to have high-quality liquid assets on hand in order to cover net cash outflows during periods of financial stress. Overall, complying with Basel III equips UK banks with the capacity to safely withstand both short- and long-term economic challenges.
Given the significance of Basel III in improving banks’ measurement of and response to financial risks, Basel 3.1 was developed as the final set of international banking reforms that enhance capital adequacy. As such, Basel 3.1 represents Basel III’s final statements on liquidity and capital standards and introduces a revised market risk framework to improve accuracy and compliance across countries and institutions.
The UK was initially set to implement Basel 3.1 by 2026, but the Prudential Regulation Authority (PRA) recently delayed the full implementation of these international banking reforms by one year. According to the PRA, the delayed timeline, which will now start in 2027, can help the UK’s financial systems gain more clarity on how the standards will be implemented in the US. This move is especially crucial considering the economic uncertainty under the Trump administration and its controversial tariff policies. The PRA’s decision can also give banks more time to prepare for tougher capital rules and ensure their capital ratios are in line with international standards.
Overall, economic events like higher tariffs, a potential recession, and stagnant economic growth can pose risks to UK banks' financial growth and success. However, banks can enhance their resilience and adaptability through regulatory reporting tools and compliance with risk management frameworks. The next step lies in collaborating with industry leaders, both in the UK and from other regions, to gain actionable insights into the effective implementation of standardised approaches and financial solutions.
