'Pockets of concern' remain in financial system

Our aim is to ensure that the financial system is as robust as it can be to withstand whatever shocks could head its way, writes Graeme Chaplin, Bank of England Agent for the West Midlands

That’s important for all of us – households and businesses – here in the West Midlands who rely on the services provided by banks, building societies and other financial institutions.

To be clear, the Financial Stability Report isn’t a series of warnings about what the Bank thinks is likely to happen.

Instead the Financial Policy Committee, which writes the report, is concerned about so-called ‘tail risks’ – or worst-possible scenarios.

The latest report assesses possible risks from a wide variety of sources both at home and abroad.

And overall the picture is an encouraging one: over the past eight years the resilience of the UK financial system has been significantly increased.

For example, losses that would have wiped out the UK banking system in 2006 could now be absorbed relatively easily. But the job is never done and new risks are always emerging. So the Financial Policy Committee is always alert to the dangers lurking around the corner.

And despite a relatively stable risk-environment overall, there are pockets of concern.

We’ve seen in the past how the housing market can quickly create problems for the wider economy.

There is some evidence that, encouraged by very low levels of late payments, some lenders have eased the conditions on mortgage lending.

The Bank needs to ensure that this doesn’t spark a rise in unsustainable borrowing, as householders take on mortgages they find they can’t afford if interest rates start to rise or unemployment increases.

So the committee has reinforced some rules around mortgage lending which should guard against this risk.

Another feature of the economy recently has been a big increase in consumer credit, especially on credit cards, personal loans and car finance.

Whilst losses on these loans are currently low, they do pose a risk to lenders, especially since such losses can materialise relatively quickly.

The latest report outlines a number of measures to address these risks. Some – such as a requirement that banks increase the amount of capital that they hold as a buffer against any shocks – will increase resilience in the sector generally.

And the committee is bringing forward planned tests on lenders’ ability to withstand losses on consumer credit in particular. Depending on the results it may then decide on further measures to address this issue.

Then there is Brexit. There are, of course, a range of possible outcomes from the negotiations that are now underway which will determine the terms, conditions and timetable for the UK’s departure from the European Union.

The committee is now overseeing finance sector contingency planning to mitigate risks associated with Brexit, especially in the event of the UK leaving the EU without a new deal in place.

I’ve not attempted to cover all of the risks that are addressed in the report, though full details are available in the online edition here. It talks in some detail, for example, of financial risks spreading from overseas economies, such as China, and the rising threat of cyber-crime.

Over the coming weeks and months, the Bank’s Agents will be investigating with their regional contacts how these issues are impacting on the lives of people across the UK.

Here in the West Midlands, we’ll be undertaking our usual regular conversations with businesses, charities and other organisations to listen to peoples’ concerns. It’s what we do every day – and the messages we pick up are fed directly into the Bank’s policymakers in London.

For now, the message is clear: the Bank is doing whatever it can to support the UK’s financial stability to ensure that households and businesses can rely on our financial sector to deliver the services upon which we all depend.

Graeme Chaplin is Agent for the Bank of England in the West Midlands

@BoEWestMids