Key Takeaways
- UK banks are resilient with healthy profits and sufficient resources to absorb shocks
- Recent bank failures led to sharp drop in risky asset prices and greater uncertainty over interest rates
- Bank of England identifies vulnerabilities in market-based finance
Overview
The Financial Policy Committee (FPC) ensures that the UK has a stable financial system that can withstand shocks and protect households and businesses.
The FPC monitors vulnerabilities and takes action to build resilience in the system. With recent overseas bank failures and stress, the FPC is monitoring the potential impact on UK banks and financial stability, but UK banks are deemed resilient.
The FPC is also working on developing standards to limit vulnerabilities in non-bank sectors of the financial system.
Multiple Bank Failures and Stress Trigger Investor Caution and Uncertainty
In recent weeks, several banks have failed or experienced severe stress. Silicon Valley Bank, the 16th largest US bank, failed due to a rapid increase in depositors withdrawing their money after significant losses. Its subsidiary in the UK was sold by the Bank of England on 13 March.
Credit Suisse, a large international bank, also faced distress and was bought by UBS. These events led to a sharp drop in risky asset prices and greater uncertainty over interest rates as investors became more cautious.
The global economic outlook is uncertain, and the financial system and broader economy are adjusting to higher borrowing costs, while geopolitical tensions add to uncertainty. The impact of these events on financial markets, UK banks, and economic conditions is being closely monitored.
UK Banks Deemed Resilient with Healthy Profits and Sufficient Resources to Absorb Shocks
The regulations for UK banks provide them with sufficient financial resources to absorb shocks, and they have healthy profits with no significant exposure to failing banks.
UK banks are deemed resilient and can continue supporting households and businesses. The UK countercyclical capital buffer rate will be maintained at 2%, providing banks with an additional buffer to withstand potential losses without limiting lending to the wider economy.
UK Households and Businesses Face Economic Pressures Amidst Higher Interest Rates
The global economic outlook remains difficult due to higher interest rates, making it challenging for households, businesses, and governments to pay off their debts.
In the UK, households are facing pressure from increased living costs and interest rates, but an improvement in unemployment and energy prices means fewer households are expected to struggle with mortgage payments compared to previous assessments.
While UK businesses are overall resilient, they are still under pressure from higher rates and the challenging economic situation, with smaller firms facing more pressure in 2023.
Bank of England Calls for Improved Resilience in UK Market-Based Finance Following Vulnerabilities in LDI and Money Market Funds
The Bank of England has identified vulnerabilities in market-based finance, specifically liability-driven investment funds and money market funds in the UK.
In late 2022, disruptions in UK government debt markets revealed vulnerabilities in LDI funds, prompting recommendations to increase their resilience to interest rate shocks.
Additionally, while money market funds play a key role in managing cash for institutions, they are vulnerable to large investor withdrawals and could pose a risk to the financial system and the wider economy.
The Bank of England is working with other authorities to improve the resilience of these funds and is set to consult on the issues soon.
For a look at all of today’s economic events, check out our economic calendar.
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James Hyerczyk