Shares in Lloyds, Natwest and HSBC rise as Reeves looks to rule out a Labor raid on lenders

Banks breathed a sigh of relief after Rachel Reeves appeared to rule out a review of the way lenders receive interest at the Bank of England.

Shares of the British lenders were among the biggest gainers in a broader market rally on Wednesday. Lloyds rose 2.1 percent, while Natwest rose 1.8 percent. HSBC gained 1.6 percent.

The market moves came after Reeves, the shadow chancellor, said she had “no plans” to change the way interest is paid on the around £770 billion of commercial bank deposits held by major lenders at the Bank of England.

“Paying interest on reserves is part of the transmission mechanism of monetary policy; it is one of the ways higher interest rates feed through to the real economy,” she added.

The financial system was flooded with new reserves during the Bank of England’s various rounds of quantitative easing. The Bank of England pays interest on these reserves, which are ultimately funded by the taxpayer.

As interest rates have risen over the past two years, major lenders have seen higher income from holding money at the Bank. According to the Treasury Committee, Natwest, Barclays, Lloyds and Santander together earned £9 billion in interest from the Bank of England.

Figures from across the political spectrum, including Gordon Brown and Reform UK, have suggested that the Treasury could save billions by not paying interest on at least some of these reserves.

“I don’t think this would be without danger,” Reeves said.

Reeves’ comments were met with approval across the industry. “Changing the current approach would have real consequences for the UK economy and is likely to result in higher banking costs for consumers and businesses,” said David Postings, CEO of UK Finance. City AM

“It would also effectively place an additional burden on the banking sector, which already pays both a corporate tax surcharge and a bank levy, and make the UK less internationally competitive.”

One banking sector source also argued that increasing reserves would “detrimentally impact the competitiveness of the financial sector when supporting growth is the real priority”.

Jonathan Pierce, an analyst at Deutsche Numis, said Reeves’ announcement was “good news” for banks and should allow investors to focus on improving financial performance in the autumn.

However, he warned that this might not be the end of the story. “None of this means the problem has completely gone away,” Pierce said. “Boosting reserves or higher direct taxes on banks may ultimately prove too attractive for a future government facing difficult budget decisions.”

Andrew Bailey has also consistently spoken out against the idea, describing it as a tax on the banking system. He said this would require a fundamental rethink of the way monetary policy works.

“Paying a bank rate on reserves anchors the implementation of monetary policy,” Bailey told the House of Lords in February.