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Free AccessBOE FSR Sees increased risks as economic outlook worsens
The Bank of England's December Financial Policy Report points to increased economic risk, as growth and employment outlooks worsen.
Key points:
- Financial markets have experienced higher borrowing costs, pushing up long-term yields and dampening risk appetite. This, alongside a weak growth outlook, is beginning to weigh on debt vulnerability.
- Households and businesses are coming under stronger financial stress, yet remain in aggregate more resilient than in previous crises. Corporate debt to earnings are only marginally lower than pre-pandemic, yet SMEs remain more exposed to weak demand and increasing costs.
- Bank sector resilience is judged as adequate, due to strong capital and liquidity positions and robust profitability outlooks associated with larger lending margins.
- The Bank has decided to hold the CCyB at 2% (effective July '23) to ensure financial market liquidity in the case of stress, yet stands ready to adjust this if need arises.
- Reducing non-bank risk is seen as an urgent priority, following the Mini-Budget shock to gilt markets and UK financial stability. The FPC has recommended minimum resilience buffers from approx. 150bp to 300-400bp for the time being and enforcement of these to be improved through international coordination.
- In 2023, the FPC will commence the (international) first non-bank sector stress test, yet the speed of this is unclear due to the scope of research required.
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