A financial system that works for all

A KEY job of the Bank of England is to ensure that the financial system works well for everyone.

By that, we mean that households and businesses across the country can rely on banks, building societies and other financial firms through thick and thin. We know from the thousands of conversations we have had with businesses here in the West Midlands since the financial crisis the costs to us all when that isn’t the case. It makes it harder for businesses to raise money to invest and create jobs. And families find it more difficult to access mortgages to allow them to buy a house or move home.

For this reason, every year the Bank of England subjects the UK’s major banks to a rigorous stress test to see how well they would cope with a severe economic downturn.

In this year’s test, the scenario was particularly challenging. It included a sharp drop in economic growth at home and overseas, a big rise in unemployment to nearly ten per cent, higher interest rates and a severe fall in property prices. Despite the severity of that test, for the first time since the Bank of England began stress-testing in 2014, the banks came through it without the need to take any action. These results give us confidence that the banking system can continue to provide a service to businesses and households even in much tougher economic conditions than they face today. This would even be the case if the UK experienced a disorderly exit from the European Union.

Of course, Brexit could affect the financial system more broadly. For this reason, the Bank has also set out some key steps that need to be taken to minimise the impact on this important sector of the UK economy in the event of a no-deal outcome.

The Bank’s latest Financial Stability Report also addresses other issues that I know people are concerned about including the level of household debt. In order to address these risks, the Bank’s Financial Policy Committee has already taken action in the mortgage market to guard against the risk of looser underwriting standards and prevent an increase in the number of highlyindebted households.

Growth in consumer credit is another area the committee has addressed, by requiring banks to make more realistic assumption about the potential losses on that type of lending. By stress-testing the banking system, assessing the potential impact of a disorderly Brexit and guarding against other pockets of risk, the Financial Policy Committee is taking action to reinforce the financial stability of the UK. That should give households and businesses confidence that the financial system will continue to provide for them, whatever the future holds.