The primary objective of the Financial Policy Committee (FPC) for the UK’s financial system is to ensure its preparedness and resilience against a wide range of risks. The ultimate goal is for the system to absorb potential shocks rather than amplify them, in order to support UK households and businesses.
Overall Risk Environment
The overall risk environment has remained relatively unchanged from the previous quarter. Despite the general optimism in markets, global risks present several challenges. While UK household and corporate borrowers have displayed resilience, many still encounter pressures. Nevertheless, UK banks are well-positioned to assist households and businesses, even in more severe-than-anticipated economic and financial conditions.
Financial Market Developments
The Monetary Policy Committee’s (MPC) central projection for UK GDP growth, unemployment, and inflation has slightly improved. Conversely, the global growth outlook is anticipated to strengthen in the medium term, notwithstanding several risks. Recent economic data has altered market expectations regarding policy rate reductions in the US and UK, and markets have also reacted to the impending French parliamentary elections.
Global Vulnerabilities
A number of global vulnerabilities persist, particularly in the US commercial real estate market and uncertainties stemming from upcoming global elections. These factors could result in economic uncertainty, financial market volatility, and additional risks for UK financial stability.
UK Household and Corporate Debt Vulnerabilities
Though aggregate UK household debt relative to income has been declining, numerous households, including renters, still grapple with challenges arising from escalating living costs and interest rates. Similarly, measures of UK corporate debt vulnerabilities have decreased, yet some highly leveraged corporates remain at risk.
Private Equity Sector
The private equity (PE) sector, crucial for funding UK businesses, is confronted with challenges in the higher interest rate environment. High leverage and limited transparency in valuations contribute to potential vulnerabilities in the sector.
UK Banking Sector Resilience
The UK banking system maintains robust liquidity and capital positions, capable of supporting households and businesses even in adverse conditions. However, system-wide factors, including central banks unwinding extraordinary post-GFC and Covid pandemic measures, will impact bank funding and liquidity.
The UK Countercyclical Capital Buffer Rate Decision
The FPC is keeping the UK countercyclical capital buffer (CcyB) rate at 2%, prepared to adjust it based on economic and financial conditions, underlying vulnerabilities, and the overall risk environment.
Resilience of Market-Based Finance
The FPC underscores significant vulnerabilities in market-based finance, notably heightened leverage among hedge funds. International and domestic regulatory efforts to address excessive leverage risks are essential.
In conclusion, the FPC aims to monitor and mitigate risks to ensure the stability and resilience of the UK financial system. It acknowledges the importance of coordinated efforts by global authorities in addressing vulnerabilities and promoting financial stability.