“The current outlook for UK financial stability is challenging,” the Bank of England warned on Tuesday.
The central bank’s Financial Policy Committee has released its biannual financial stability report looking at the financial health of Britain and assessing any changes to the outlook since the most recent report.
The TLDR is: Things look bad, and it is mostly because of the European Union referendum.
The report says Britain’s referendum on its EU membership remains “the most significant near-term domestic risks to financial stability.”
The Bank of England says that many of the potential risks it had identified in the run-up to the referendum had “begun to crystallise.” In other words, the doom-laden predictions are beginning to come true.
The central bank says it is “closely monitoring” the situation and “stands ready to take actions that will ensure that capital and liquidity buffers can be drawn on, as needed, to support the supply of credit and in support of market functioning.”
Regulation has been relaxed to give banks more breathing room, with the capital buffer — the amount of cash or readily sellable assets on hand — reduced to 0% of UK exposure from 0.5%. This should free up £5.7 billion ($7.4 billion), “raising banks’ capacity for lending to UK households and businesses by up to £150 billion.”
The main economic assessment was done in March, well before the referendum, but the central bank identifies several key ways in which the result could influence stability. The report also reflects on some of the most notable changes since the referendum, such as bank shares tanking 20% and the pound cratering against the dollar.
Here are the key risks the vote for a British exit from the EU, or Brexit, poses to financial stability, as per the BOE:
- Financing of the UK’s large current account deficit, which relied on continuing material inflows of portfolio and foreign direct investment;
- The UK commercial real estate (CRE) market, which had experienced particularly strong inflows of capital from overseas and where valuations in some segments of the market had become stretched;
- The high level of UK household indebtedness, the vulnerability to higher unemployment and borrowing costs of the capacity of some households to service debts, and the potential for buy-to-let investors to behave procyclically, amplifying movements in the housing market;
- Subdued growth in the global economy, including the euro area, which could be exacerbated by a prolonged period of heightened uncertainty; and
- Fragilities in financial market functioning, which could be tested during a period of elevated market activity and volatility.
It is not hard to see how many of this risks are “crystalizing” into realities. On the current account deficit, the pound has fallen to a 30-year-low against the dollar and Britain’s credit rating has been marked down, making it more expensive to borrow.
An estimated £650 million of commercial property deals in London alone have fallen through since the referendum, according to the Financial Times. Standard Life’s UK property fund also had to freeze withdrawals after it was overwhelmed by people trying to pull money out.
Last November’s stability report from the central bank signalled an improving global economy, but fears of increasing cyberattacks and a faltering Asian economy affected the outlook. July’s report was the first report since Britain opted for a Brexit. Mark Carney, the Bank of England governor, has previously warned that a Leave vote could tip the UK into recession.
Carney will answer questions on the report from the press at 11 a.m. BST (6 a.m. ET). Business Insider reporter Will Martin will be reporting from Threadneedle Street.
The governor reassured markets shortly after the Brexit vote that the UK’s central bank was ready to inject £250 billion of liquidity to keep everything on an even keel. Many market watchers expect Carney to outline in his press conference more details as to how he will do this.
Connor Campbell, a financial analyst at SpreadEx, says in an emailed statement Tuesday morning: “Focus will likely more be on Mark Carney’s post-report speech than the financial stability results themselves, with some thinking that the Bank of England chief could use this opportunity to announce measures that relax the amount of capital banks have to hold.”
Michael van Dulken, head of research at Accendo Markets, agrees, saying he expects “details about how it plans to ease the capital burden on banks, to keep financing alive for businesses and households and the economic consumer and business confidence ball up in the air.”
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