News Release
Bank of England Publishes Latest Financial Stabilty Review
26 November 1999
The Bank of England today published the latest issue of the Financial Stability Review. Some of its main points and themes are reviewed in the attached 'Editorial'.
Commenting, Deputy Governor, David Clementi said:
"The Review reports and comments on developments relating to the Bank's responsibility for the overall stability of the financial system as a whole. The articles are representative of major elements in the Bank's work under this heading, centering on the promotion of structures and policies to enhance the robustness of the financial system, on the surveillance of risks to stability, and on crisis management. Several of the articles contribute to current debate on the international and domestic financial "architecture" and infrastructure.
The review of the Financial Stability Conjuncture and Outlook, published for the first time in June, sets out the Bank's current assessment of threats to financial stability. The Bank sees greater transparency in presenting its financial stability surveillance work as an important part of its new role following the 1997 reorganisation. Because of London's position as an international financial centre, the review covers developments in both industrial and emerging market economies and in financial markets themselves. Problems in any of these areas could have an impact in London and so on UK firms and markets."
The Conjuncture and Outlook survey (summarised on pp 93-96) concludes that although financial systems have been less stressed in the past six months than they were a year ago, there remains a heightened perception of, or a lower appetite for, risk. To the extent that this reflects a more realistic view of the world, it is welcome. But it may also reflect some continuing concerns about financial stability. These include downside risks from emerging market economies which need to address debt levels and debt structures, and actively pursue financial sector reform; from buoyant global equity markets, accompanyed in some countries by high household and/or corporate indebtedness; from persistent capital account imbalances; from rapid credit growth and asset price rises in some of the smaller euro area countries; and from continuing fragility in Japan (see Emerging market economies, pp 10-30; Major industrialised economies pp 31-45).
In financial markets, spreads on corporate bonds and swaps have generally remained high and have at times been volatile. There are suggestions that some markets, including the UK gilt market, are less arbitraged and liquid following a withdrawal of risk capital and reduced leverage. If that persisted, risk management by firms may be complicated. However, it may simply be a consequence of a scaling back of trading activity and risk-taking in the run up to Y2K. Meanwhile, confidence that the Year 2000 period will pass without crisis seems to have increased over recent months, although the Bank stands ready to take remedial measures if necessary (see International financial markets pp 46-56; Year 2000 pp 57-63).
Domestically, the survey suggests that the UK financial system generally remains healthy. Going forward, there is however a need for careful monitoring of several areas as robust economic growth continues, including house prices, consumer lending, and lending to the commercial property sector (The UK household and corporate sector pp 64-72; The UK financial sector pp 73-87). Picking up the theme of emerging market debt structures, the survey presents some preliminary analysis of the UK's own external balance sheet (see, for example, pp 70-71 and 76-77).
Notes to Editors
- This is the seventh issue of the FSR. It was launched in autumn 1996 and restructured for the June 1999 issue reflecting the change in the Bank's responsibilities, which in the financial stability area are now macroprudential rather than related to the regulation and supervision of individual firms.
- The FSA are represented on the editorial board of the FSR.
