The Bank of England has warned that escalating trade wars, global instability, and rising global debt levels are increasing risks to the UK’s financial system.
Officials noted that the country is vulnerable because of its “open economy with a large financial sector,” according to the latest Financial Stability Report.
Andrew Bailey, governor of the Bank, highlighted the uncertain situation, saying, “We live in an uncertain world in many ways. We are watching these risks carefully.”
Key concerns include international trade disruptions as conflicts in Ukraine and the Middle East escalate and as the US considers tariffs on countries such as China, Mexico, and Canada. Rising public debt in countries such as the UK and the US also poses significant risks.
The report identified growing risks outside of mainstream banking, particularly in the banking sector, including private equity firms and hedge funds. The sector has been linked to market crises, such as the 2022 pension fund turmoil and the collapse of Archegos earlier that year.
To address these risks, the Bank has conducted the world’s first stress test of the UK’s wider financial system, which simulates major market shocks across banks, hedge funds, pension funds, and insurance companies. The findings revealed potential weakness in the high-quality corporate bond market and mismatched expectations in the gilt repo market, which indicate risks in times of financial stress.
While Britain’s biggest banks have passed separate annual stress tests with adequate reserves, the Bank of England has announced that these tests will now take place every two years, with additional tests in subsequent years.
The Bank also raised concerns about private sector ownership of health insurance companies, warning that it could pose further risks.
Despite these challenges, the report confirmed the resilience of traditional banking institutions. However, as global uncertainty grows, the Bank’s scrutiny of less regulated financial sectors underscores the emerging difficulties of safeguarding UK financial stability.
