BoE: Brexit uncertainty could cause credit crunch

The Bank of England’s Financial Policy Committee (FPC) has warned that “heightened and prolonged uncertainty” over the June 23 EU referendum “could lead to a further depreciation of sterling and affect the cost and availability of financing for a broad range of UK borrowers.”

The FPC also said it “remains alert to potential threats to financial stability” from the rapid growth in buy-to-let UK mortgage lending and that it is supporting moves to tighten mortgage lending standards to landlords.

It said that with a relatively high level of UK household indebtedness, “debt serviceability remains vulnerable to shocks to interest rates, employment or growth.”

The BoE said the UK current account deficit remained high by historical and international standards and the financing of that deficit “is reliant on continuing material inflows of portfolio and foreign direct investment.”

The committee warned: “Those flows have contributed to the financing of the public sector financial deficit and corporate investment, including in commercial real estate.

“Heightened uncertainty could test the capacity of core funding markets at a time when the liquidity of these markets has shown signs of fragility across advanced economies.

“In addition, the impact of a decision of the United Kingdom to withdraw from the European Union could spill over to the euro area, driving up risk premia and further diminishing the prospects for growth there.”

The FPC said it considered the risks around the EU referendum to be the most significant near-term domestic risks to financial stability.

In its statement about its policy meeting on March 23, the FPC said the outlook for financial stability in the United Kingdom had deteriorated since it last met in November 2015.

“Some pre-existing risks have crystallised, drawing on the resilience of the system,” said the FPC.

“Other risks stemming from the global environment have increased. Domestic risks have been supplemented by risks around the EU referendum.

“Weighed against these developments, the resilience of the core banking system has improved further since November 2015, though investor expectations of future profitability have weakened, with possible implications for banks’ ability to build resilience in the future.

“In some financial markets, underlying liquidity conditions have continued to deteriorate.”

 

Read the full FPC statement here: http://www.bankofengland.co.uk/publications/Pages/news/2016/032.aspx

About the Author

Mark McSherry
Dalriada Media LLC sites are edited by veteran news journalist Mark McSherry, a former staff editor and reporter with Reuters, Bloomberg and major newspapers including the South China Morning Post, London's Sunday Times and The Scotsman. McSherry's journalism has also appeared in The Washington Post, The Guardian, The Independent, The New York Times, London's Evening Standard and Forbes. McSherry is also a professor of journalism and communication arts in universities and colleges in New York City. Scottish-born McSherry has an MBA from the University of Edinburgh and a Certificate in Global Affairs from New York University.