A revival of the eurozone crisis and the resilience of the Chinese economy are regarded by policymakers at the Bank of England as significant risks to financial stability.
The Bank’s financial policy committee cited these factors, alongside a concern that markets were mispricing risk, as it published its quarterly assessment of the health of the financial system.
The members of the FPC, which is chaired by Bank of England governor Mark Carney, also revealed that they are to hold an extra meeting next week to discuss how much capital banks should hold when measured by the so-called leverage ratio.
The leverage ratio, unlike other ways of measuring the financial health of banks, does not allow them to make judgments about whether some of their assets are riskier than others.
The amount of capital they must hold as measured by the leverage ratio was published on 31 October. It had not originally been scheduled until the middle of 2015.
The committee, which was set up by the coalition in the wake of the 2008 financial crisis, said it had discussed the risk of a prolonged period of very low euro-area inflation at its last meeting on 26 September.
“Weak growth and declines in headline inflation in the euro area were a particular source of concern,” the FPC said.
Banks have already cut their exposure to the eurozone in the wake of the crisis three years ago, but the committee said it “would continue to monitor developments in the euro area closely, including banks’ direct and indirect exposures”.
The committee also revealed it was watching China.
“Committee members remained concerned about the potential for financial stability threats to originate from China as it rebalanced towards a more domestic demand-driven economy.
The Chinese housing market had been slowing and while annual credit growth had eased it remained close to 20%,” the record of the latest meeting said.
With the threat of fines looming over the industry – six big banks are said to be facing combined fines of £1.8bn for rigging currency markets – the committee discussed the risks to financial stability posed by the size of the fines.
The committee “noted increased uncertainty around some aspects of misconduct-related enforcement action, for instance those implemented by other national authorities, and a lack of clarity in some cases about the basis for computing fines and the severity of possible business activity restrictions.”
One member had warned about banks becoming more risk averse.
“One member also noted that regulatory complexity and uncertainty more broadly, not just in relation to misconduct issues, were making banks increasingly risk averse, with potential implications for economic performance.
Other members noted that greater risk aversion was an objective of the response to the financial crisis,” the record said. The FPC also discussed whether it should require banks to hold an additional buffer of capital on top of the current regulatory minimum.
It decided not to, but said it would review this in the last three months of the year after the results of the current stress tests being conducted by the large banks.
The banks are being subjected to two health checks at the moment: one by the European Banking Authority, which is expected to publish the results on its tests of 100 eurozone lenders on 26 October, and one by the Bank of England, which is expected to be published before the end of the year.
One of the factors banks need to know when assessing their financial strength is how much capital regulators will want them to hold when measured by a leverage ratio rather in terms of a more sophisticated capital ratio.
The banks will learn the level at which the leverage ratio will be set as they report their third-quarter results in the next few weeks. It is currently set at 3%, but there is an expectation it could be raised, requiring banks to hold more capital than they do currently.
theguardian.com
The Bank’s financial policy committee cited these factors, alongside a concern that markets were mispricing risk, as it published its quarterly assessment of the health of the financial system.
The members of the FPC, which is chaired by Bank of England governor Mark Carney, also revealed that they are to hold an extra meeting next week to discuss how much capital banks should hold when measured by the so-called leverage ratio.
The leverage ratio, unlike other ways of measuring the financial health of banks, does not allow them to make judgments about whether some of their assets are riskier than others.
The amount of capital they must hold as measured by the leverage ratio was published on 31 October. It had not originally been scheduled until the middle of 2015.
The committee, which was set up by the coalition in the wake of the 2008 financial crisis, said it had discussed the risk of a prolonged period of very low euro-area inflation at its last meeting on 26 September.
“Weak growth and declines in headline inflation in the euro area were a particular source of concern,” the FPC said.
Banks have already cut their exposure to the eurozone in the wake of the crisis three years ago, but the committee said it “would continue to monitor developments in the euro area closely, including banks’ direct and indirect exposures”.
The committee also revealed it was watching China.
“Committee members remained concerned about the potential for financial stability threats to originate from China as it rebalanced towards a more domestic demand-driven economy.
The Chinese housing market had been slowing and while annual credit growth had eased it remained close to 20%,” the record of the latest meeting said.
With the threat of fines looming over the industry – six big banks are said to be facing combined fines of £1.8bn for rigging currency markets – the committee discussed the risks to financial stability posed by the size of the fines.
The committee “noted increased uncertainty around some aspects of misconduct-related enforcement action, for instance those implemented by other national authorities, and a lack of clarity in some cases about the basis for computing fines and the severity of possible business activity restrictions.”
One member had warned about banks becoming more risk averse.
“One member also noted that regulatory complexity and uncertainty more broadly, not just in relation to misconduct issues, were making banks increasingly risk averse, with potential implications for economic performance.
Other members noted that greater risk aversion was an objective of the response to the financial crisis,” the record said. The FPC also discussed whether it should require banks to hold an additional buffer of capital on top of the current regulatory minimum.
It decided not to, but said it would review this in the last three months of the year after the results of the current stress tests being conducted by the large banks.
The banks are being subjected to two health checks at the moment: one by the European Banking Authority, which is expected to publish the results on its tests of 100 eurozone lenders on 26 October, and one by the Bank of England, which is expected to be published before the end of the year.
One of the factors banks need to know when assessing their financial strength is how much capital regulators will want them to hold when measured by a leverage ratio rather in terms of a more sophisticated capital ratio.
The banks will learn the level at which the leverage ratio will be set as they report their third-quarter results in the next few weeks. It is currently set at 3%, but there is an expectation it could be raised, requiring banks to hold more capital than they do currently.
theguardian.com
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