The Bank of England warned on Friday that increasing trade barriers could hurt global growth and fuel uncertainty about inflation, which could cause volatility in financial markets and raise borrowing costs for businesses and consumers.
Without specifically referring to Donald Trump’s victory in the US presidential elections, the Bank of England said that the financial system may also be affected by disruption of cross-border capital flows and reduced ability to diversify risks.
The Bank of England explained in a semi-annual report on the financial system, “The low degree of international cooperation in policies may hinder the progress made by the authorities in improving the resilience of the financial system and its ability to absorb future shocks.”
When asked at a press conference about the potential impact of a second Trump presidency, Bailey reiterated his position that he wanted to see what policies the Trump administration would pursue, adding: “We are seeing an increase in the risks of global fragmentation. But I would say there are a lot of reasons behind that and I don’t think there are “It is right to pin it on a specific event.”
While UK households, businesses and banks appeared to be in good shape, the Bank of England report said, Britain’s financial sector faces risks of “particular importance” given the openness of the British economy.
Other threats include rising levels of public debt in many economies around the world.
“Uncertainty around the outlook and the risks it threatens have increased,” the report said.
Bailey responded to a complaint from new Finance Minister Rachel Reeves that British regulators had inadvertently damaged the economy by taking too tough a stance on risk-taking in the financial sector.
“There is simply no trade-off between financial stability and growth,” he said. “This is a key point.”
But he said there were options on how to enforce the rules and said the Bank of England’s announcement on Friday that it would conduct full health checks on British banks once every two years, rather than annually, was an example of how it could help competitiveness in the sector.
Bailey also stressed the importance of international minimum financial standards in the wake of the US elections on November 5.
The Bank of England said it continued to judge that valuations and risk premia in financial markets were “vulnerable to a sharp correction” due to risks to growth, inflation and uncertainty over interest rates.
He warned that “such a correction could be amplified by long-standing weaknesses in market-based finance” and could push up borrowing costs for British households and businesses.
The Bank of England said that its latest tests of the resilience of British banks showed that they enjoy good capital and high levels of liquidity, explaining that non-bank financial institutions such as hedge funds remain vulnerable to a sudden financial shock and may be forced to carry out a rapid sale of assets such as British corporate bonds in this scenario.
In the future, the central bank plans to conduct full stress tests once every two years from 2025, reducing administrative pressures on lenders and allowing the Bank of England to focus on other potential financial risks.
The Bank of England will conduct less detailed desk-based stress tests, where needed, in the intervening years.
The Bank of England kept its counter-cyclical capital buffer (CCyB), or the “rainy day” capital requirement for banks to draw on in bad times, at its neutral setting of 2%.
