MNI: BOE FPC Sees Severe Financial Shocks More Likely

The Bank of England's Financial Policy Committee highlighted the risks to  financial stability posed by fragmentation triggered by the US trade policies, stating that the global risk environment has worsened, severe shocks were more likely and the chance of further sharp asset price corrections high.

The minutes of the BOE FPC's April meeting made clear that the Bank sees the consequences of the trade conflict as a clear threat to financial stability and, although market functioning so far had been orderly, the rise in market volatility in recent days has fed through to a marked increase in margin calls.

The FPC identified highly leveraged trading strategies and leveraged corporates which rely on market based finance as potentially vulnerable when assessing where the shocks may hit. Private equity firms, which typically have high leverage, were cited among the Bank's stability concerns.

The knock-on effects of US trade policies are pushing down on global growth and up on financial risks in the BOE's view, with the volatility in markets in itself creating risks.

Sharp increases in government bond yields "could crystalise relatively quickly" against a backdrop of high debt-to-GDP ratios and the threat of capital outflows, the FPC noted.

Risk premia have remained relatively tight by historic standards, pointing to a risk of a sharp correction, although market intelligence suggested some hedge funds had de-risked their portfolios before the April 2 US tariff announcement, the FPC minutes said.

UK HOUSEHOLDS MORE REILLIENT

While the FPC highlighted concerns over leveraged corporates and asset markets it took a fairly sanguine view of the resilience of UK banks and household finances.

Household debt-to-income ratios have declined to their lowest level since Q4 2001 and the FPC judged that the banking sector would be able to support households and businesses even if financial conditions worsened substantially. Banks are well capitalised and have high liquidity levels, the FPC noted.

 The BOE left its bank safety buffer, the countercyclical capital buffer (CCyB), unchanged at 2% but said it stood ready to increase it given the potential impact of future global shocks.