Britain’s financial system is strong enough to cope with the shock of a trade war-driven global slowdown even if it coincides with a “disorderly” Brexit, the Bank of England has said.
The bank said in its Financial Stability Report that the risk of crashing out of the EU had increased since the start of the year while rising trade tensions posed higher risks to the global outlook.
It said greater uncertainties over Brexit had weighed on markets, pointing to sharp falls in foreign investment in commercial property and loans to highly-indebted companies.
But the bank added that in recent months, the government and business had taken “some steps to improve the preparedness of the real economy for a disorderly Brexit”.
That includes border and customs preparations as well as agreements for Britain to roll over existing trade deals it has with the rest of the world as a current member of the EU.
The bank has previously assessed Britain’s lenders and insurers as being able to withstand the impact of a worst-case Brexit scenario.
It has now judged that this would be the case even if such a scenario were to be combined in a double-whammy with a worldwide slowdown prompted by trade tensions – as Donald Trump threatens China, Europe and Mexico with a range of higher tariffs.
That included a scenario in which Washington and Beijing ramp up duties on goods imported from each other to 25% and there is a global trade war in the car manufacturing sector.
“Even if a protectionist-driven global slowdown were to spill over to the UK at the same time as a worst-case disorderly Brexit, the FPC judges that the core UK banking system would be strong enough to absorb, rather than amplify, the resulting economic shocks,” the bank said.
However, it cautioned that this did not mean there would be wider market stability, with “significant volatility” to be expected in the case of no deal.
In a wide-ranging report, the bank’s Financial Policy Committee (FPC) also revealed that it was considering reforms in the wake of the recent suspension of Neil Woodford’s equity income fund.
That could mean forcing funds which offer clients same-day redemptions of their investments – which are often in illiquid, or hard-to-sell assets – to instead offer longer notice periods.
The potential reform reflects the bank’s increasing concern that not enough is being done internationally to tackle such “open-ended funds”, and that problems in this sector could have the potential to cause wider disruption.
It is also planning a formal assessment of the risks posed to financial stability by climate change, to be published in 2021.
In addition, it is weighing up the implications of the cryptocurrency “tokens” such as the Libra venture being backed by Facebook.