MNI: Geopolitical Threats See Greater Risks To Outlook - BOE
The risks to the financial sector outlook have increased as a result of geopolitical tensions and the sterling corporate bond market could become illiquid under an extreme shock, the Bank of England said in its Financial Stability Report and associated exploration of non-bank financial vulnerabilities.
The BOE published the FSR alongside a System Wide Exploratory Scenario (SWES) which aimed to boost understanding of the risks to and from non-bank financial institutions and it warned that the sterling corporate bond market could face "a jump to illiquidity" if hit by a hefty shock. The FSR warned that many asset valuations were stretched and vulnerable to sharp corrections.
Banks unwillingness to take on risk and rapid sales by pension funds meeting recapitalization calls is a risk in the sterling corporate bond market according to the SWES report. The BOE found that pension and other fund managers had a common strategy of selling sterling corporate bonds, rather than sovereign debt, first in a response to a shock creating the risk of heavy sales into a falling market.
The SWES highlighted the growing trend of non-bank financial institutions, notability liability driven investment and money market funds, of using non-cash collateral to meet margin calls, which exposes them to additional risks when a shock hits.
RISK PREMIA NEAR LOWS
The FSR highlighted the oddity of rising asset prices with risk premia dropping to near historic lows, despite a rise in geopolitical tensions. The FSR warned that market finance was vulnerable to a crystallisation of risks which could hit UK credit availability.
The BOE nevertheless concluded that that the UK banking system was well placed to support households and businesses even if conditions deteriorated significantly and that, in aggregate, households and corporate borrowers were likely to remain resilient.
The BOE left the counter cyclical capital buffer unchanged at 2%, its neutral rate. It will also switch to bank stress tests every two years rather than once a year.
Resilience in the gilt market, however, has improved.
HIGHER MORTGAGE COSTS
The FSR also provided updated figures for the pass through from the rate hiking cycle to mortgagees, with the UK mortgage markets dominated by fixed rate deals.
The BOE said 37% of fixed rate mortgage accounts had yet to re-fix since the start of the hiking cycle and by Q4 this year and Q4 2027 some 50% of mortgage accounts were set to refinance to higher rates. The financial hit to borrowers, however, is expected to be smaller than when the BOE last assessed it in June.
On average monthly mortgage repayments were expected to rise by 22%, or GBP146, over the next three years compared to the previous estimate of 28%.