In good times and bad, Bank of England is here

In its latest review of risks, the Bank of England’s Financial Policy Committee (FPC) reports its latest assessments for financial stability, mortgage lending and Brexit, says Jay Jobanputra.

August 2018

The FPC’s latest risk report covers a wide range of possible sources of instability, from capital to credit to cyber. 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, it was judged 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.

Stress tests

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.

There is, however, no room for complacency. In recent months, the cost of borrowing for some companies and households has edged up a little. And consumer credit continues to expand rapidly. The FPC highlighted this as a risk in its assessment at the back end of last year when it acted to ensure that lenders are able to absorb severe losses on this type of lending.

As for the housing market, the lenders’ 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 standards.

Brexit looms

Of course, when identifying financial stability risks, the UK’s pending departure from the European Union looms large. The Bank of England is acting in three principal ways to reduce the impact of these risks on UK households and businesses.

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, however unlikely that may be.

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. Its latest assessment is that progress has been made but material risks remain.

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. Even so, the report points out that avoiding the risks of a cliff-edge Brexit also relies on the efforts of EU authorities.

The FPC has also announced new measures to deal with cyber risks to financial services, ensuring if firms are hit by them, they get back on their feet quickly in a way which doesn’t cause financial stability concerns.

Our absolute objective is to ensure that the financial system continues to provide a service to households and to all types and sizes of businesses in good times and bad.

Jay Jobanputra is Agent for the Bank of England in London. Read the BOE’s latest risk review 

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