Financial Policy Summary And Record - October 2020
8th October 2020
The Bank of England's Financial Policy Committee (FPC) assesses the outlook for financial stability by identifying the risks faced by the financial system and weighing these against the resilience of the system.
Covid-19 continues to pose challenges for households and businesses
Covid-19 has put a big strain on UK businesses' earnings, and is threatening the livelihoods of many people. The recent increases in Covid-19 cases, and associated public health measures, have the potential to weigh further on economic activity.
Households and businesses have needed help from banks and financial markets to weather the economic disruption associated with Covid-19. Since the global financial crisis in 2008, we've taken actions to strengthen the UK financial system. As a result, UK banks are strong enough to keep supporting households and businesses through this difficult period.
Major UK banks are strong enough to keep supporting UK households and businesses through this difficult period
The UK banking system remains resilient to a very wide range of possible economic outcomes.
Our tests of the major UK banks in August showed that the banking system was strong enough to keep lending to UK households and businesses, even in the face of severe economic difficulties. They have big buffers of capital that they can use to keep lending, even while weathering losses.
Many businesses and households have relied on banks and financial markets for support during Covid-19
Since the start of the Covid-19 shock UK businesses have raised over £75 billion of net additional financing from banks and financial markets ― in large part through government-backed loan guarantee schemes. This has helped many businesses to keep paying wages and their suppliers, even if they face serious cash flow problems. More than 1.8 million mortgage holders have benefited from a payment holiday, so that debt-servicing pressures have remained low even as incomes have been under strain.
The UK authorities and financial sector have measures in place to limit disruption to financial services at the end of the transition period, following the UK's exit from the EU
Most risks to UK financial stability that could arise from disruption to cross-border financial services have been mitigated, even if the transition period ends without the UK and EU agreeing further arrangements for financial services. This reflects extensive preparations made by authorities and the private sector.
However, some disruption to financial services could arise, particularly for EU-based clients, even if it does not pose a risk to financial stability.
Banks and other financial institutions have made further preparations for the end of the transition period. And it is important that they continue to do so to minimise the risk of disruption.
Irrespective of the particular form of the UK's future relationship with the EU, we will remain committed to the implementation of robust prudential standards in the UK.
Our UK-EU preparations
UK authorities and financial sector firms have made extensive preparations over the transition period.
Most risks to UK financial stability have been mitigated.
Some disruption to financial services could arise, even if it does not pose a risk to financial stability.
We are working with international partners to strengthen financial markets so they can support the economy better, even under stress
Financial markets play an important role in supporting the economy and provide a substantial amount of finance to businesses.
Central bank interventions were necessary to stabilise financial markets after an abrupt and disruptive ‘dash for cash' in March. Although markets have continued to function well since, further episodes of market disruption are possible.
The underlying weaknesses that caused problems in March have not yet been addressed. We are working with other central banks and regulators to ensure financial markets can continue to serve the economy even under stress.
Because of the global nature of markets, this work is being internationally co-ordinated. Together with other governments, regulators and central banks, we are actively participating in a review of the provision of market-based finance in light of the Covid-19 shock.
The underlying issues that disrupted financial markets in March need to be examined and addressed
The mismatch between how quickly investors can get their money out of certain investment funds, and the time it takes to sell the assets in these funds.
How financial market participants manage their cash, so they don't have to sell their assets quickly in stress.
Whether central banks should be able to lend cash to the wider financial system in stress, in order to keep important markets functioning.