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19th July 2022

Partner Insight: Bank of England’s Financial Stability Review

In the latest Financial Stability Review, the Bank of England’s Financial Policy Committee (FPC) set out its views on the stability of the UK financial system.

In the UK and across the world, the prices of food, fuel, and many other essential goods have risen sharply this year, largely as a result of Russia’s illegal invasion of Ukraine.

This price inflation has cut the spending power of many households and businesses, putting their budgets under pressure and worsening the outlook for the economy.

And we’ve heard first hand of the growing impact of inflation on households through our Citizens’ Panels, and from charities on our Community Forums in Wales.

Like other central banks around the world, the Bank of England has raised interest rates to help fight inflation.

With all of these things combined, it’s going to become harder for some households and businesses to repay the money they owe banks.

And there are risks of further pressure on the banks.

For example, the Russian invasion of Ukraine could disrupt world commodity markets even more.

Businesses that are highly exposed to those markets may see big falls in their profits, and households may face even higher prices.

While the outlook is very uncertain and undoubtedly very challenging for many households and businesses, the FPC judges that the major banks will be able to weather this economic hit and continue lending.

This is because banks have to hold much more loss-absorbing capacity, called capital, than they did before the global financial crisis.

And the FPC has told banks that they’ll have to increase their capital further next year because of the worsening economic outlook.

With this capital in store, they will be able to help households and businesses manage their financial risks and investments throughout what is going to be a difficult period.

Later this year there will be another ‘stress test’, where the big banks are put through to scenarios of very big economic downturns to see how strong they would be.

The FPC will also continue to monitor risks to the UK financial sector from other areas, such as high levels of debt in the Chinese property market, the growth of cryptoassets, and climate change.

With the help of the insights provided by contacts here in Wales and the rest of the UK, the FPC will maintain financial stability in the face of a difficult economic outlook.

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