On 13 December 2022, the Bank of England (the Bank) published the Financial Policy Summary and Record of the Financial Policy Committee (FPC) meetings on 28 November 2022 and 8 December 2022.
The FPC seeks to ensure the UK financial system is prepared for, and resilient to, the wide range of risks it could face, so that the system is able to absorb rather than amplify shocks, and serve UK households and businesses.
Financial market developments and global debt vulnerabilities: The deterioration in the global economic outlook, together with heightened uncertainty and the potential for further adverse geopolitical developments, has led to falls in risky asset prices and a reduction in investor risk appetite. Financing conditions for households and businesses have tightened significantly. Overall, moves in risky asset prices have been generally orderly, but the risk of sharp adjustments from further developments in the outlook remains.
UK households and corporate debt vulnerabilities: While pressure on households will increase, the FPC judges that households are more resilient now than in the run-up to the global financial crisis in 2007 and the recession in the early 1990s. Households are in aggregate less indebted compared to the peak that preceded the global financial crisis. The core UK banking system is also more resilient, in part due to lower risk lending to households. The greater resilience of banks and the higher standards around conduct also mean they are expected to offer a greater range on forbearance options.
UK external balance sheet vulnerabilities: There were signs that foreign investor demand for UK assets weakened in September and early October, but this has since reversed. Over the second half of 2022 as a whole, UK asset prices have moved broadly in line with euro-area equivalents. A particularly large and rapid fall in foreign investor demand for UK assets could pose a more acute risk to UK financial stability if it led to difficulties refinancing UK external liabilities, but the FPC judges that this risk, at present, is low.
UK bank resilience: The FPC continues to judge that the UK banking system is resilient to the current economic outlook and has capacity to support lending, even if economic conditions are worse than forecast. Major UK banks’ capital and liquidity positions remain strong and pre-provision profitability has increased.
UK countercyclical capital buffer rate: The FPC is maintaining the UK countercyclical capital buffer rate at 2%, due to come into effect on 5 July 2023. The global and UK economic outlooks have deteriorated and financial conditions have tightened. Maintaining a neutral setting of the UK countercyclical capital buffer rate in the region of 2% helps to ensure that banks continue to have capacity to absorb further unexpected shocks without restricting lending in a counterproductive way.
Cryptoassets: Cryptoasset prices have continued to decline sharply. The FPC continues to judge that direct risks to UK financial stability from cryptoassets remain limited, but recent events in the U.S. have highlighted how systemic risks could emerge if cryptoasset activity and interconnectedness with the wider financial system increase. They underscore the need for enhanced regulatory and law enforcement frameworks to address developments in crypto markets and activities. Financial institutions and investors should take an especially cautious and prudent approach to any adoption of these assets until the necessary regulatory regimes are in place.
The resilience of market-based finance: The FPC welcomes the Financial Stability Board’s (FSBs) recent progress report to G20 leaders and the proposed work plan for 2023, which includes developing policy recommendations that seek to address vulnerabilities. Alongside this international work, the Bank will continue to work to reduce vulnerabilities domestically where it is effective and practical. To support this, there is a need to develop stress-testing approaches to better understand the resilience of non-bank financial institutions (NBFI) to shocks and their interconnections with bank and core markets. The Bank will run, for the first time, an exploratory scenario exercise focused on NBFI risks, to inform understanding of these risks and future policy approaches. Further details will be set out in the first half of 2023.
The resilience of liability-driven investment funds: The FPC is of the view that liability driven investment (LDI) funds including in relation to operational and governing processes and risks associated with different fund structure and market concentration. Further steps will also need to be taken to ensure regulatory and supervisory gaps are filled, so as to strengthen the resilience of the sector. The Bank will continue to work closely with domestic and international regulators so the LDI vulnerabilities are monitored and tackled.