British banks hold enough capital to cope with a simultaneous disorderly no-deal Brexit and global trade war, the Bank of England said on Thursday as part of its half-yearly assessment of financial risks.
In an assessment that raised little in the way of new concerns, the BOE confirmed it would intensify its focus on risks such as illiquid investment funds, liquidity shocks, crypto-currencies and environmental dangers.
“The perceived likelihood of a no-deal Brexit has increased since the start of the year,” the BOE’s Financial Policy Committee said.
“The UK banking system remains strong enough to continue to lend through the wide range of UK economic and financial shocks that could be associated with Brexit,” it added.
Since the BOE’s last Financial Stability Report in 2018, Brexit has been delayed from March 29 to Oct. 31.
Prime Minister Theresa May has repeatedly failed to get parliament’s backing for her plan to ensure a smooth exit from the European Union, and the two main contenders to succeed her have said Britain may need to leave without a deal.
Businesses have said such a move would cause widespread economic disruption, and the BOE noted a sharp fall in foreign investors buying British commercial property and some company loans during early 2019.
Britain runs a large current account deficit with the rest of the world, and BOE Governor Mark Carney has previously warned that the country relied on “the kindness of strangers”, which could evaporate during market tensions.
“Financial stability is not the same as market stability. Significant volatility and asset price changes are to be expected in a disorderly Brexit,” the BOE said on Thursday.
Trade tensions between the United States and China had also increased global financial risks, especially against a backdrop of a rising number of heavily indebted companies in the United States, continental Europe and elsewhere, the BOE said.
The FPC said it would team up with a fellow regulator, Britain’s Financial Conduct Authority, to assess whether investment funds should be required to set lengthier withdrawal periods for investors if they hold hard-to-sell assets such as commercial property.
This follows the suspension in June of a fund from Neil Woodford, one of Britain’s best known money managers, after it was unable to meet demands from clients wanting to pull out their money.
The suspension was renewed indefinitely this month.
Valued at over 10 billion pounds at its peak, the fund has dropped to 3.5 billion pounds as managers sell assets to meet redemption requests once the fund reopens.
The BOE said its concerns centred on funds that focused on illiquid assets such as commercial property and some corporate or emerging market bonds, rather than company shares that are easily traded.
The BOE also said it would look at the risk posed by the use of so-called “tokens” and other assets used to make payments outside the mainstream financial system.
Last month Facebook drew worldwide interest when it announced plans to establish its own payment system, backed up by a currency it calls Libra.
Carney said the U.S. company should not expect its new Libra currency to benefit from the same unregulated free-for-all that helped the company achieve a dominant position in social media.
Banks’ ability to withstand liquidity shocks would also be put under the microscope later this year, the BOE said, though it added that it did not intend to tighten liquidity rules. The aim of the exercise was to look at ways to mitigate the spillover to other parts of the economy.
British-based banks already hold 1 trillion pounds in liquid assets to cope with a disorderly Brexit or other shocks.
Frontpage November 19, 2017