Data from the July 2016 Financial Stability Report
It is the statutory responsibility of the Financial Policy Committee (FPC) to identify, monitor and take action to remove or reduce systemic risks, with a view to protecting and enhancing the resilience of the UK financial system. By fulfilling this responsibility, the FPC ensures that risks to financial stability are addressed. Transparency about risks is essential to strengthen resilience and for plans to be put in place to manage those risks should they crystallise.
Consistent with its remit, the FPC identified in March the risks around the referendum on the United Kingdom’s membership of the European Union as the most significant near-term domestic risks to financial stability.
The Committee had identified the following channels through which the referendum could increase risks to financial stability:
The FPC has monitored these channels of risk closely. There is evidence that some risks have begun to crystallise. The current outlook for UK financial stability is challenging.
There will be a period of uncertainty and adjustment following the result of the referendum. It will take time for the United Kingdom to establish new relationships with the European Union and the rest of the world. Some market and economic volatility is to be expected as this process unfolds.
The degree of uncertainty and nature of adjustment is evident in financial market prices, which have moved sharply following the referendum. Between 23 June and 1 July, the sterling exchange rate index fell by 9% and short-term volatility of sterling against the dollar rose to its highest level in the post-Bretton Woods
era. Equity prices of UK banks have fallen on average by 20%, with UK-focused banks experiencing the largest falls. Equity prices of domestically focused companies have fallen by 10%. The ten-year UK government bond yield fell by 52 basis points. These moves reflect an increase in risk premia on UK assets, a perceived weaker growth outlook, and anticipation of some future deterioration in the United Kingdom’s terms of trade and supply capacity.
Rises in funding spreads for investment-grade borrowers and banks have been more than offset by falls in risk-free interest rates. Between 23 June and 1 July, investment-grade corporate bond yields fell by around 25 basis points. Wholesale debt funding costs for the major UK banks fell by a similar amount. Overall bank funding costs — taking into account any increase in the cost of equity and the change in wholesale debt funding costs — are broadly unchanged since the referendum.
During this period of uncertainty and adjustment, the resilience of the UK financial system, upon which financial stability depends, is grounded on:
The FPC is focused on promoting a financial system that dampens, rather than amplifies, the impact of uncertainty and adjustment on the real economy. This means reducing any pressure on firms to restrict the provision of financial services, including the supply of credit and support for market functioning.
The FPC is monitoring closely the risks of: further deterioration in investor appetite for UK assets; adjustments in CRE markets leading to tighter credit conditions for businesses; increasing numbers of vulnerable households and procyclical behaviour of buy-to-let investors; the outlook for the global economy; and reduced and fragile liquidity in core financial markets.
Having consistently built over recent years the resilience that is necessary for the system to face this challenging outlook, the FPC stands ready to take actions that will ensure that capital and liquidity buffers can be drawn on, as needed, to support the supply of credit and in support of market functioning. At policy meetings on 28 June and 1 July:
As the outlook evolves, the FPC stands ready to take any further actions deemed appropriate to support financial stability
Watch the Press Conference