UK banks are strong enough to serve households and businesses even through a disorderly, cliff-edge Brexit, however unlikely it may be.
The UK is taking all the action it can to make sure households and businesses won’t have their financial services disrupted during Brexit. The EU needs to act to stop households and businesses there and in the UK facing disruption.
The FPC is concerned by the rapid growth of risky lending to businesses.
Emerging market debt has risen in the past decade. This makes those economies, and the world economy, riskier.
The Financial Policy Committee (FPC) aims to ensure the UK financial system is resilient to, and prepared for, the wide range of risks it could face — so that the system can serve UK households and businesses in bad times as well as good.
At its meeting on 3 October, the FPC reviewed developments since its meeting on 19 June.
The FPC continues to judge that the UK banking system would be strong enough to serve UK households and businesses through a disorderly, cliff-edge Brexit.
The UK banking system lies at the core of the UK financial system. Reflecting the substantial increase in its resilience over the past decade, the UK banking system now has the capacity to absorb, in addition to a disorderly, cliff-edge Brexit, further misconduct costs and stresses that could arise from intensifying trade tensions and a further sharp tightening of financing conditions for emerging markets.
An implementation period would reduce the risks of disruption to the supply of financial services to UK and EU households and businesses as the UK exits the EU. The FPC has been monitoring risks of disruption that could arise in the absence of an implementation period or any other agreement (see the updated checklist in Table 1). There has been considerable progress in the UK to address these risks, but only limited progress in the EU. In the limited time remaining, it is not possible for companies on their own to mitigate fully the risks of disruption to cross-border financial services. The need for authorities to complete mitigating actions is now pressing.
Irrespective of the particular form of the UK’s future relationship with the EU, and consistent with its statutory responsibility, the FPC will remain committed to the implementation of robust prudential standards in the UK. This will require maintaining a level of resilience that is at least as great as that currently planned, which itself exceeds that required by international baseline standards.
The FPC continues to judge that, apart from those related to Brexit, domestic risks remain at a standard level overall.
The risk appetite of creditors remains strong. But financial conditions have tightened over the course of the year and borrower demand has been restrained. As a consequence credit growth has slowed.
The Committee is concerned by the rapid growth of leveraged lending, including to UK businesses. The FPC will assess any implications for banks in the 2018 stress test and also review how the increasing role of non-bank lenders and changes in the distribution of corporate debt could pose risks to financial stability.
Given the current balance of risks, the FPC is maintaining the UK countercyclical capital buffer (CCyB) rate at 1%. The FPC will conduct, as normal, a comprehensive assessment of the resilience of the UK banking system in the 2018 stress test and review the adequacy of the 1% CCyB rate at its meeting on 28 November.
Risks to the UK from global vulnerabilities remain material. Accordingly, the 2018 stress scenario incorporates a synchronised global downturn in output growth.
Recognising the deployment of resources both within the Bank and at private institutions to prepare for Brexit, the FPC and PRC have decided to delay the Bank’s launch of the next biennial exploratory scenario to September 2019. The Bank expects to publish the results of this exercise alongside the Financial Stability Report in June 2020.