CREDIT MACRO: BoE FSR: Resilient System, More On Shadow Banks in 4Q24

BoE Financial Stability Review: from a credit perspective, indicative of a resilient banking system and borrowers coping with rate stress well – so a positive affirmation for bank credit. There is a more prominent warning around shadow banking, however which highlight risks in e.g. private credit and its non-IG borrower community. More on this is due in 4Q24.

• The term “sharp correction” has been elevated into the front section headlines. The Bank sees risks to the UK financial system as similar to 1Q24 but notes that “some asset prices have continued to rise, and the risk of a sharp correction persists”. Previously this warning appeared on page 7. 
• Commentary around global risks appears similar to last time around and it notes that UK households and businesses have “remained resilient” to higher rates, which is also similar language to the last review. It also continues to see the banking system as strong enough to cope “even if the economy does worse than expected” but this comment has more prominence than previously.
• Finally, market-based finance (shadow banking) gains greater profile in this review. The bank has been investigating this market, alongside global peers, for at least the last year now. It states that round 1 of the “system-wide exploratory scenario” (SWES) gave useful insights into how banks and non-banks might react of financial market shocks. Results from round 2 are due in 4Q24 – one to watch.