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21st December 2020

Partner Insight: UK financial system remains resilient to challenges

Steve Hicks, the Bank of England’s agent for Wales, commented on the resilience of the UK’s financial system at the end of 2020

This year, more than ever, businesses and households have needed support from the financial system to weather the disruption brought by Covid. Underpinned by guarantees from government, businesses have borrowed £80bn so far this year, four times the amount they had raised by this time last year. The hardest hit have had their incomes supported by the extension of the furlough scheme, and households have benefitted from payment holidays on mortgages, loans and credit agreements.

Thanks to the resilience built into the system after the financial crisis over a decade ago, UK banks have been able to continue to lend despite losses as a result of Covid. Banks now hold three times more capital, known as their loss absorbing ability, than they did before the financial crisis. To date they have provisioned for £20bn of credit losses as a result of the economic effects of Covid. However, their capital buffers mean that they could absorb losses of almost ten times that amount.

We are also reaching the end of the transition period with the EU. Since the referendum over four years ago, firms and authorities in the financial sector have made extensive preparations and as a result most risks to financial stability have been mitigated. However, financial stability is not the same as market stability. As we move to new arrangements with the EU, some market volatility, particularly in foreign exchange and equity prices, and disruption to financial services could arise.  Whatever our future relationship with the EU, the Bank of England remains committed to maintaining high regulatory standards in the UK.

One of the economic effects of Covid is that the mortgage market has tightened this year and there has been less availability of high loan-to-value (LTV) mortgages. History shows us that financial crises can often be associated with the property market which is why we guard against the biggest risks here. That is why the Bank of England placed limits on the proportion of new high loan-to-income (LTI) mortgages in 2014.  The aim was to protect households against shocks to their income and jobs and future increases in interest rates. But those risks change over time, especially whether the measures are calibrated correctly, which is why we will be reviewing our recommendations again next year.

Finally, Covid has accelerated the trend toward digital payments. We have been considering the potential effects on the financial system from stablecoins – the most commonly heard example being Libra (recently renamed as Diem) – to be adopted widely. Stablecoins are digital tokens that claim to maintain a stable value in relation to existing national currencies.  As part of our work on this, we will also consider the issues that may arise from the introduction of a central bank digital currency, or in other words an electronic form of Bank of England issued money that could be used by businesses or households.

This year, Covid has presented unprecedented challenges for the UK and global economy.  To end on a positive, the financial system has proved resilient to those challenges and the work that the Bank of England does will mean that this continues to be the case into the future.

We at the Bank of England Agency for Wales wish all of you a Happy Christmas and a safe and prosperous 2021.

For more information see the Bank of England’s December 2020 Financial Stability Report

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