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Categorized | Banks

US politics, bond yields and Brexit all test financial stability, says BoE

Posted on November 30, 2016

The result of the US election earlier this month has “reinforced existing vulnerabilities” in the financial system, the Bank of England has warned, adding that the outlook for financial stability in the UK remains challenging.

Vulnerabilities that were already considered “elevated” by the BoE have got worse since its last report on financial stability in July in the weeks following the UK’s vote to leave the European Union, the central bank said on Wednesday in its assessment of risks to the financial system.

The election of Donald Trump as US president has pushed up yields on sovereign bonds from advanced economies, while also weighing on expectations around global trade.

“The US election has reinforced existing vulnerabilities,” the BoE’s twice-yearly Financial Stability Report reads. “Following the US election, there have been significant changes in global asset prices. Expectations of expansionary US fiscal policy have contributed to an increase in advanced economy sovereign yields, reversing much or all of their falls observed earlier in the year.”

UK banks are particularly exposed to China, Hong Kong and emerging markets — around 20 per cent of UK banks’ total assets. The report highlighted the difficulty of emerging markets servicing their debts in the new environment.

Financial firms sharply pulling out of London because of Brexit could also threaten financial stability — both that of the UK and of Europe as a whole, the BoE added.

“If any such adjustments take place in a short timeframe, there could be a greater risk of disruption to services provided to the European real economy, which could spill back to the UK economy through trade and financial linkages,” the report reads.

The BoE also flagged risks from European banks — particularly Italian ones — which are suffering from various headwinds and have questions over the viability of their business models. The report also highlighted the various unresolved misconduct investigations hanging over European banks.

But despite the challenges the BoE considers the UK system to be strong enough; it is happy with the overall level of capital in the banking system following Wednesday’s publication of its stress tests — even though Royal Bank of Scotland failed and vulnerabilities were highlighted at Barclays and Standard Chartered.