BOE 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.