BoE reveals top 5 systemic risks to UK financial system
The phrase “too big to fail” often accompanies discussions of systemic risk, particularly in relation to the government bailouts of Britain’s biggest banks during the Global Financial Crisis (GFC).
Despite massive rescue packages, the economy in the UK and other developed countries across the world went into free fall. Understandably, systemic risks to the financial system are therefore crucial to monitor.
Last month, the Bank of England (BoE) published its latest review of systemic risks in the UK, which is based on a poll of market participants. Here are the top five results:
1. UK political risk
More than nine in ten respondents cited UK political risk as a potential cause of widespread market failures. Unsurprisingly, Brexit proved a significant concern, with 80 per cent of people who mentioned political risk explicitly referring to the UK’s separation from the EU.
This figure may be even higher now, given that David Davis and Boris Johnson have left their roles as Brexit secretary and foreign secretary, respectively.
2. Cyber attacks
For the third consecutive survey, the proportion of respondents who cited cyber attacks increased – up five percentage points to 62 per cent. This was still nearly 30 percentage points less than UK political conditions, emphasising the concern over Brexit as a systemic risk.
However, more than half (51 per cent) said cyber attacks would be the most difficult risk to manage as a firm, which was only slightly lower than UK political risk (52 per cent).
3. Geopolitical risk
While respondents cited geopolitical risks and cyber attacks with equal frequency as a risk (62 per cent), only 37 per cent considered geopolitical problems as a top-three most difficult risk to manage.
The main concerns were increasingly protectionist economic policies and the ongoing threat of global conflicts. Tellingly, the proportion of people who mentioned protectionist policies as a risk more than doubled, as US president Donald Trump continues to announce tariff increases on foreign imports.
4. Monetary and fiscal policies
Nearly one-third (32 per cent) of those surveyed were concerned about monetary and fiscal policies, which was up five percentage points since the second half of 2017.
Threats of another interest rate increase no doubt contributed to these concerns. While the rate remained at 0.5 per cent in June, there are signs that an August hike is on the horizon.
5. Another economic downturn
The UK’s last recession ended in June 2009, but 26 per cent of respondents to the BoE survey believe the country could be heading for another downturn.
GDP edged forward just 0.1 per cent in the first quarter of 2018, before climbing 0.4 per cent in the subsequent three-month period. Two consecutive quarters of negative growth are required for the country to officially enter a recession, making it unlikely to occur this year.
Preparing for the future
With Brexit on the horizon, the UK is entering a time of political and economic uncertainty, which is clearly weighing on the minds of many businesses in the country.
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Our 2018 Market Reports combine our review of the prevailing conditions in the risk management recruitment market with the results of our latest employer survey.
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