Bank of England sees 'challenging' outlook for UK financial stability

Mark Carney, governor of the Bank of England at the start of the bank's financial stability report news conference at the Bank of England on Nov 30, 2016.
Mark Carney, governor of the Bank of England at the start of the bank's financial stability report news conference at the Bank of England on Nov 30, 2016.PHOTO: BLOOMBERG

LONDON (REUTERS) - Britain's financial system faces a"challenging" outlook due to risks posed by leaving the European Union and other factors including the recent US election, the Bank of England said on Wednesday.

The danger posed by leaving the EU depended on how smoothly the process went, and whether businesses in the EU lost access to British financial services, which would hurt both Britain and the EU's economy, the BoE said.

The central bank's Financial Policy Committee also flagged a wide range of other risks. The US presidential election "reinforced existing vulnerabilities".

"Following the US election, there have been significant changes in global asset prices," the FPC said in its half-yearly financial stability report. "The rise in advanced economy sovereign yields, coupled with risks of reduced global trade, has reinforced the vulnerabilities associated with those emerging market economies with high levels of debt," the BoE added.

Following Britain's vote to leave the EU in June, the likelihood of further risks to financial stability remained "elevated", the BoE said. "The orderliness of the adjustment will influence the risk to financial stability," the BoE said.

The BoE also saw other potential threats, including rapid credit growth in China and the health of the euro zone banking system and bond markets, as well as concern about British commercial real estate, parts of which remained overvalued.

Separately, the BoE also released its annual bank stress tests, which Royal Bank of Scotland failed, requiring it to raise extra capital.

The BoE also made no change to its recommendation in June 2014 that lenders should restrict high loan-to-income mortgages. No more than 15 per cent of mortgages should be for amounts greater than 4.5 times a borrower's income, it said, leading to a slowdown in mortgage approvals for around a year.

Figures on Tuesday showed the number of mortgages approved in October was the highest since March, and earlier this month the BoE revised up its forecast for mortgage approvals.

Policymakers also predicted house prices would rise by around 0.5 per cent each quarter over the next six months, up from earlier predictions of a modest fall in the wake of Britain's vote to leave the EU.