The crisis in Greece, a slowdown in China and eurozone are the main international risks to the financial system, says the Bank of England, which is concerned that markets could suddenly seize up and a pose a threat to stability.
As the Bank’s financial policy committee – set up to monitor risks in the system and chaired by the governor, Mark Carney - published its quarterly update on its assessment of the markets, it said that the annual stress tests on banks would focus on such international risks.
The scenarios will be published on Monday. Last year’s stress tests were more focused on risk from a slowdown in the UK economy and collapse in house prices.
In its statement following its meeting on 24 March, the FPC said: “International and geopolitical risks to financial stability in the United Kingdom persist. Despite recent encouraging signs, the risk of a low nominal growth in the euro area persists.
“There are also risks associated with a further slowdown in China and to some emerging economies as the stance of monetary policy begins to diverge globally. There also remain significant risks in relation to Greece and its financing needs, including in the near term.
“Any of these risks could trigger abrupt shifts in global risk appetite that in turn might lead to a sudden reappraisal of underlying vulnerabilities in highly indebted economies, or sharp adjustments in financial markets,” the Bank said.
Investors are assuming that they will be able to buy and assets easily, the Bank said, even though “liquidity in some markets may have become more fragile”.
“This could lead to heightened volatility and undermine financial stability. The committee judges that there is a need for a market participants to be alert to these risks, price liquidity appropriately and manage liquidity prudently,” the Bank said.
Using the US bond market as an example, the Bank said that market movements can be more sudden because trading volumes have fallen.
The Bank has been raising concerns about the potential liquidity risk in the financial system for some time but will now ask fund managers how they would handle a deluge of requests from investors to redeem their cash.
In the UK, the Bank said that risks from the housing market and indebtedness of households have not increasedbut it has been reviewing loans for commercial property, which also formed part of last year’s stress tests on banks. While it is not currently concerned, it might “consider appropriate actions if underwriting standards threaten to evolve in an unsustainable way”.
Carney also wrote to George Osborne to say that the FPC was also looking at identifying “domestically systemically important banks”which could be required to hold extra capital. These are likely to include major building societies.
The governor also said that the FPC was concerned about financial firms’ ability to withstand cyberattacks and would receive the results of tests later this year.
This article was written by Jill Treanor, for theguardian.com on Thursday 26th March 2015 13.58 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010