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