UK finance, defence trade bodies explore funding blueprint for arms race

Reuters

05-03-2025

Summary
Companies
Lobby groups outline potential solutions to financing snags
UK government pledges to up defence spending to 2.5% of GDP
Defence shares have been rising, lenders face compliance burden
LONDON, March 5 (Reuters) - Top trade bodies for Britain's financial services and defence industries met on Wednesday to craft a wishlist of policy reforms they say could drive more debt finance and equity capital towards Britain's defence sector, sources said.
TheCityUK, UK Finance and defence industry peer ADS Group convened as European governments unveil rearmament plans driven by Russia's war in Ukraine and fears that Europe can no longer be sure of U.S. protection.
British Prime Minister Keir Starmer pledged last week to increase annual defence spending from 2.3% to 2.5% of GDP by 2027 and to target 3% - a level last seen just after the Cold War. On Tuesday, German lawmakers proposed a landmark overhaul of borrowing rules to fund its military and the European Commission said it could borrow up to 150 billion euros to lend to EU governments eyeing similar goals.
TheCityUK and UK Finance between them represent some of Britain's largest finance firms, including HSBC (HSBA.L), opens new tab, Barclays (BARC.L), opens new tab and Legal & General (LGEN.L), opens new tab. ADS's membership includes defence giant BAE Systems (BAES.L), opens new tab.
Together the trade bodies agreed to make a coordinated push to tackle some of the "friction points" that govern how banks and investment firms can support arms manufacturers.
The joint recommendations, to be submitted to Britain's business minister Jonathan Reynolds, will include policies to reduce lending risk via improved sharing of information, faster payments to small companies in defence supply chains and clearer regulatory signals that defence investment is compatible with ESG mandates.
"In our view, there's no silver bullet here because of the complexity of the regulatory landscape," David Raw, managing director, commercial finance, at UK Finance told Reuters.
A December 2023 paper, opens new tab published by UK Finance and ADS identified 10 international frameworks and agreements that had a bearing on the supply of financing to businesses in the defence and security industry.
"The one thing the government can definitely do is speak up more vociferously for banks who are lending to the defence sector because this can, reputationally, put some in a difficult position," Raw said.
Activists have targeted numerous branches of Barclays (BARC.L), opens new tab in recent months in protest against the lender's provision of financial services to companies that produce equipment used by the Israeli Defence Forces.
WHO PAYS?
U.S. President Donald Trump has suspended United States military aid to Ukraine in its fight against Russia, and has demanded European countries pay much more to protect their borders.
Trump has called on NATO members to spend 5% of GDP on defence, more than double the organisation's 2% guidelines.
European Commission President Ursula von der Leyen warned that Europe was now living in "an era of rearmament".
Lenders and investors are exploring how they can help bankroll the effort without breaching international rules or sparking ire among customers opposed to warfare or weapons manufacturing on ethical grounds.
Britain has tried to encourage private investment in defence companies, including funds with sustainable criteria. European money managers have been steadily adding aerospace and defence stocks to such funds, with the weighting up to 0.5% from 0.3% in two years, Morningstar data shows.
European defence company stocks have soared in the last few weeks and rose again on Wednesday as investors bet on their growing order books.