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     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: