The Bank of England published its financial stability report on Tuesday and it’s full of useful charts and graphs about threats to the UK’s banking system.
On the whole, the financial world is looking more stable now than during the Summer, which was dominated by Greek political instability and market crashes in China.
But lots of risks still remain and some, like the threat of a cyber attack or a downturn in Asian economies, worry the Bank of England more than ever.
The BOE has long been concerned about buy-to-let, because landlords are seen as more vulnerable to an increase in mortgage rates than owner-occupiers.
Here's the BOE:
Strong growth in buy-to-let lending, and the potential for underwriting standards to slip, may have implications for financial stability.
UK banks have strong ties with China. This is great when the country is growing strongly but can pose a risk when there's a downturn.
The BOE said:
Crystallisation of these risks could pose a threat to UK financial stability, particularly if shocks to asset prices were amplified by fragile market liquidity. This vulnerability came to the fore in August 2015, when an episode of intense volatility in some markets materialised against the backdrop of concerns among market participants about a possible slowdown in economic growth in China.
Cyber attacks on financial institutions are costly to protect against and dangerous if they succeed. The central bank is trying to encourage lenders to do more to protect themselves.
The BOE said:
The risk from cyber attack has grown over time, reflecting increased use of technology in financial services. Firms need to build their resilience to cyber attacks, develop the ability to recover quickly from attacks, and ensure effective governance -- which means viewing cyber risk as a strategic priority, rather than a narrow 'technology' issue.
Bank fines and compensation to customers is falling but still eating up billions of pounds of profit.
Fines for misconduct have swallowed up 40% of banking profits for the past four years, according to the BOE. This is set to continue:
Given the number of ongoing investigations and redress actions, it is likely that misconduct costs will remain high in the near future. But there is considerable uncertainty about the size of these costs.
This chart shows that people are most worried about an economic downturn, while geopolitical risks and cyber attacks are increasing threats.
The BOE asked senior financial executives what worried them the most. By far the biggest risk was seen to be a downturn in the global economy.
Here's the BOE to explain:
There were notable increases in the proportion of respondents citing risk of an economic downturn (56% to 72%) and cyber attack (30% to 46%). Regarding the former, about one third of respondents specifically cited concerns about China and EMEs, and about one quarter mentioned the risk of a UK downturn.
China's market crash earlier this year sent the VIX, known as the fear index, spiking to levels not seen since the global financial crisis in 2007-2009.
The BOE is worried that periods of financial volatility can be made worse by the lack of liquidity in the system -- which means fewer buyers and sellers will find a price that suits them.
'Despite such episodes of intense market volatility, there is evidence that market and liquidity risks may not be fully reflected in the prices of some financial assets,' the BOE said.