Economy

BoE: Brexit, Household Indebtedness Main Risks To UK's Financial Stability

BoE: Brexit, Household Indebtedness Main Risks To UK's Financial Stability

While BoE Governor Mark Carney said earlier this year that Brexit is no longer the biggest risk to United Kingdom stability, the central bank said yesterday that it still wants to review all lenders' contingency plans. The central bank said that the additional test means that the impact of both lower and higher interest rates can be assessed.

In 2016 the Royal Bank of Scotland failed its stress test and was forced to increase its financial strength by £2 billion. The 2017 cyclical scenario therefore incorporates a sudden increase in the rate of return investors demand for holding sterling assets and an associated fall in sterling.

The "exploratory stress test" will probe the UK's seven largest lenders on how they would cope with weak global growth, low interest rates, falling world trade and cross-border banking activity as well as misconduct costs over that time.

The tests - failed by RBS a year ago - are essentially aimed at ensuring banks have the money and systems in place to handle sudden headwinds.

RBS was past year forced to raise around £2 billion to boost its balance sheet after failing the Bank of England's annual health check.

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"Sudden adjustment could disrupt the provision of market liquidity and investment banking services", the BoE said. Barclays and Standard Chartered also missed some thresholds in last year's exercise.

The FPC said it now overseeing contingency plants to reduce financial stability risks as negotiations get under way.

Increasing debt levels in China, vulnerable sovereign debt positions in Euro-area countries and greater uncertainty for global trade and financial integration were all notable risks to the global economy, the FPC said.

The FPC was also concerned about a surge in household debt, already high by historical standards, with consumer credit "growing particularly rapidly".

The Bank also pointed to the growing backlash against worldwide trade and integration of the global financial system as a major risk.


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