UK financial firms’ concern about geopolitics at record high

The share of UK financial services firms worried about geopolitical risks is at its highest level since the 2008 crash, the Bank of England said.

The BOE’s semi-annual systemic risk survey, which began during the financial crisis, said on Wednesday that 93% of firms now see geopolitics as a key threat to the UK financial sector, up 8 percentage points. Fears about cyber-attacks have also increased, while the percentage of firms citing the threat of an overseas or global economic downturn more than doubled to 33%.

The survey of 55 firms was conducted between July 23 and August 12, before the latest escalation of tensions in the Middle East.

The financial policy committee, which includes BOE officials and outside experts, however said risks to the UK’s financial stability were “broadly unchanged” from June 2024, according to minutes of its September 19 meeting.

The central bank continued to raise global risks, including hedge funds’ net short position in US Treasuries, which the BOE said continued to increase. Their current level of $1 trillion exceeds the previous peak of $875 billion in 2019, the BOE said.

However, officials noted that August’s volatility failed to trigger a significant rebound in hedge fund positioning, unlike the deleveraging that rocked global finance in March 2020.

Hedge funds’ use of borrowing to finance bets on the bond market, such as the so-called underlying deal on US Treasuries, has been a long-standing concern for global authorities. In April, the International Monetary Fund warned that a small group of funds’ bets on the treasury market were so large that they could destabilize the broader financial system in times of stress.

Meanwhile, divergent central bank interest rate policies add to uncertainty for government bond prices. Even as the European Central Bank and the Federal Reserve cut their policy rates, the BOE held steady at its latest meeting.

The FPC said the market’s reaction to the Bank of Japan’s interest rate hike in July “highlighted the potential risk associated with this normalization of monetary policy, which was important for financial institutions to be prepared for.”

Officials cited broader risks in market-based financing, which includes everything from hedge funds to private equity, private credit and insurers. They warned that markets remained “susceptible to a sharp correction” after valuations, particularly in equities, returned to “stretched” levels following a spike in volatility in August.

Britain’s banks, households and businesses continue to be broadly resilient, the BOE said, while warning that the full impact of the adjustment to higher rates has yet to be felt as some borrowers have not had to refinance their loans since rates started to rise. A “significant portion” of UK corporate bonds are due to mature in the coming years, the report said.

In the mortgage market, the BOE said a third of homeowners have yet to refinance their loans to higher rates. While household mortgage costs relative to income are expected to rise, they will remain below the historic peaks of the 1990s and the global financial crisis, it said.

The BOE repeated warnings that artificial intelligence could pose a risk to financial stability, but said the technology’s impact was “highly uncertain” and that relatively little work had been done on its potential to pose risks to the financial system, unlike risks to individuals. companies.

Photo: Commuters pass the Bank of England in the City of London. Photo credit: Jason Alden/Bloomberg

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