By: JurmoloyaRava
A KEY job of the Bank of England is to ensure that the financial system works well for everyone.
By that, we mean that households and businesses can rely on banks, building societies and other financial firms through thick and thin.
For example, in my role as agent for financial stability, I often meet businesses that saw the worst of the financial crisis and its impact on provision of financial services.
There are costs to us all when the financial sector does support the real economy. It makes it harder for businesses to raise money to invest and create jobs. And families find it more difficult to access mortgages and personal loans.
For this reason, every year the Bank of England subjects the UK’s major banks to a rigorous stress test to see how well they would cope with a severe economic downturn. In this year’s test, the scenario was particularly challenging. It included a sharp drop in economic activity, a big rise in unemployment, higher interest rates and a severe fall in property prices.
Despite the severity of that test, for the first time since the bank began stress-testing in 2014, the banks came through it without the need to take any action. These results reflect the hard work done to increase the resilience of our banks since the financial crisis – a process that is continuing.
And they give us confidence that the banking system can continue to provide a service to busine-sses and households even in much tougher economic conditions. This would even be the case if the UK experienced a disorderly exit from the European Union.
Of course, Brexit could affect the financial system more broadly. For this reason, the bank has also set out some key steps that need to be taken to minimise the impact on financial services and hence the UK economy in the event of a no-deal outcome.
The bank’s latest Financial Stability Report also addresses other issues that many people are concerned about. These include the level of household debt which, at £1.6 trillion, is high by historic standards and relative to income, even though it remains below its 2008 peak. Debt often gets a bad press but it provides a valuable service, notably by allowing people to finance purchases they could not otherwise make. But high household indebtedness can pose a risk to financial stability.
To address these risks, the bank’s Financial Policy Committee (FPC) has already taken action in the mortgage market to guard against the risk of looser underwriting standards and prevent an increase in the number of highly-indebted households.
Fast growth in consumer credit is another area the committee has addressed, by requiring banks to make more realistic assumptions about the potential losses on that type of lending.
By vigorously stress-testing the banking system, assessing the potential impact of a disorderly Brexit and guarding against other risks such as in consumer credit, the FPC is taking action to reinforce the financial stability of the UK.
That should give households and businesses the confidence that the financial system will continue to provide for them, whatever the future holds.
Twitter: @BoELondon
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