Exclusive interviews with leading policymakers that convey the true policy message that impacts markets.
Reporting on key macro data at the time of release.
Real-time insight on key fixed income and fx markets.
- Emerging MarketsEmerging Markets
Real-time insight of emerging markets in CEMEA, Asia and LatAm region
- MNI ResearchMNI Research
Actionable insight on monetary policy, balance sheet and inflation with focus on global issuance. Analysis on key political risk impacting the global markets.
- About Us
By David Robinson and Jai Lakhani
LONDON (MNI) - The Bank of England Financial Policy Committee said
that, Brexit aside, domestic financial risks were standard but global
risks had risen.
Risk appetite had clearly risen but UK banks had not themselves
become riskier institutions, with lending to highly leveraged corporates
rising markedly but being transferred off the banks' balance sheets. The
FPC against this backdrop left the countercyclical capital buffer, the
banks' capital shock absorber, unchanged at 1%.
On the domestic front, the FPC in its Financial Stability Report
noted that household and corporate debt levels are well below
pre-financial crisis levels. With interest rates extremely low,
corporate debt servicing costs are at all time lows and household ones
at near record lows.
This suggests that debt levels will not be an insurmountable hurdle
to monetary tightening. The FPC estimated that it would take some 200
basis points worth of hikes in Bank Rate to push debt servicing costs
back up to average levels.
The FPC looked at the risks Brexit posed to the UK financial
sector. It restated its view that banks did not need to take on any
additional capital to cover Brexit risks as the associated risks were
less than the overall risks in the BOE's stress tests.
A major complexity related to Brexit, however, is uncovered
derivative contracts between UK and EU entities, such as a contract
between a UK and German bank.
The notional value of such derivative contracts is reckoned by the
BOE to be stg29 billion. They will be very hard to service after March
2019, when the UK leaves the EU, and while the UK government has
authorised a temporary permissions regime to help cover them there has
been no reciprocal offer from the EU.
The FPC welcomed the creation of a technical working group headed
by Bank Governor Mark Carney and European Central Bank head Mario Draghi
which will look into ways of solving the issue.
On global risks, the FPC looked at emerging markets excluding
China, which have contributed some 45% of global growth over the past
seven years. They noted the rising risk appetite, particularly for
dollar denominated debt, in this markets.
With US interest rates rising this entails that risks are
increasing in these markets.
China too poses a significant risk, with Chinese authorities trying
to curb the build up in debt against a backdrop of trade tensions and
-London newsroom: e-mail: email@example.com