‘ Where will the next shock to the fi­nan­cial sys­tem em­anate from?

Yorkshire Post - Business - - FRONT PAGE - Juliette Healey

Where will the next shock to the fi­nan­cial sys­tem em­anate from? His­tory can tell us some­thing about where we need to look and what we need to guard against. But the truth is that ev­ery fi­nan­cial shock is dif­fer­ent in its na­ture and its causes, so we have to be pre­pared for the un­ex­pected.

It is one of the key func­tions of the Bank of Eng­land to scan the hori­zon for pos­si­ble risks to fi­nan­cial sta­bil­ity for con­sumers, house­holds and busi­ness. If that risk builds too much then our job is to take ac­tion where nec­es­sary.

That re­spon­si­bil­ity sits specif­i­cally with the Bank’s Fi­nan­cial Pol­icy Com­mit­tee ( FPC). Its main role is to en­sure the ro­bust­ness of the fi­nan­cial sys­tem.

That means that, what­ever shocks head its way, the fi­nan­cial sys­tem should still be able to pro­vide a ser­vice to house­holds and busi­nesses here in York­shire and Hum­ber.

Twice a year the Bank pub­lishes the FPC’s as­sess­ment of the risks that the UK cur­rently faces.

And its lat­est re­port cov­ers a wide range of pos­si­ble sources of in­sta­bil­ity, from cap­i­tal to credit to cy­ber threats.

Im­por­tantly, con­sid­er­ing the UK is one of the most fi­nan­cially open economies in the world, the re­port also looks be­yond th­ese shores for those risks.

Its lat­est as­sess­ment fo­cuses on the risks as­so­ci­ated with re­cent po­lit­i­cal de­vel­op­ments in Italy and the po­ten­tial im­pact on other Euro­pean economies.

The re­port also looks at what is go­ing on in China, where debt lev­els re­main el­e­vated, and con­sid­ers the im­pli­ca­tions of the re­cent in­ten­si­fi­ca­tion of global trade ten­sions.

Over­all, the FPC judges that global vul­ner­a­bil­i­ties re­main ma­te­rial and have in­creased.

In con­trast, aside from those re­lated to Brexit, the FPC judges that do­mes­tic risks re­main at a ‘ stan­dard’ level.

Last year the Bank ran a stress test of the UK’s bank­ing sys­tem. The re­sults of our big­gest in­sti­tu­tions showed that they are now re­silient to se­vere do­mes­tic, global and mar­ket shocks and we’ll carry out a sim­i­lar stress test later this year.

Im­por­tantly, lev­els of house­hold and cor­po­rate debt re­main ma­te­ri­ally be­low their 2008 lev­els. And over­all credit growth re­mains broadly in line with the rate of growth of the econ­omy.

The cost of ser­vic­ing debts also re­mains low thanks to the cur­rent low level of in­ter­est rates.

There is, how­ever, no room for com­pla­cency.

In re­cent months, the cost of bor­row­ing for some com­pa­nies and house­holds has edged up. And con­sumer credit con­tin­ues to ex­pand rapidly.

As for the hous­ing mar­ket, banks’ risk ap­petite has in­creased over the past few years. But weak de­mand, re­flected in low lev­els of trans­ac­tions, has kept mort­gage credit growth mod­est.

In ad­di­tion, the FPC’s ear­lier mort­gage mar­ket mea­sures, in­clud­ing lim­it­ing the num­ber of loans that lenders can ex­tend at high loan- to- in­come ra­tios, have in­sured against a marked de­te­ri­o­ra­tion in lend­ing.

Of course, when iden­ti­fy­ing fi­nan­cial risks, the Brexit looms large. The Bank of Eng­land is act­ing in three prin­ci­pal ways to re­duce the im­pact of th­ese risks.

First, we are en­sur­ing that the UK bank­ing sys­tem could con­tinue to lend to UK house­holds and busi­nesses even in the event of a disor­derly, cliff- edge Brexit.

Sec­ond, the FPC has iden­ti­fied the most im­por­tant risks from a cliff- edge Brexit to the pro­vi­sion of fi­nan­cial ser­vices, and it has out­lined the nec­es­sary steps to ad­dress them. Third, the FPC has made clear that, ir­re­spec­tive of the par­tic­u­lar form of the UK’s fu­ture re­la­tion­ship with the EU, it re­mains com­mit­ted to the im­ple­men­ta­tion of a ro­bust reg­u­la­tory regime in the UK.

Else­where, the FPC has an­nounced new mea­sures to deal with cy­ber risks to fi­nan­cial ser­vices, whether they orig­i­nate close to home or far away.

And our ab­so­lute ob­jec­tive is to en­sure that the fi­nan­cial sys­tem con­tin­ues to pro­vide a ser­vice here in good times and bad.

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