BOE FPC: UK Domestic Risks Standard But Global Risks Rise>

     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 

slowing growth.  

-London newsroom: e-mail: david.robinson@marketnews.com  

[TOPICS: M$B$$$,M$$BE$,MABDS$]