The Financial Policy Committee (FPC) of the Bank of England has recently published its Financial Stability Report, setting out the risks identified following the EU referendum. The FPC is of the view that transparency about risks is essential to strengthen resilience and for plans to be put in place to manage those risks should they crystallise.
Some of the channels, as identified by the FPC, through which the EU referendum could increase risks to the UK financial stability include:
- The high level of UK household indebtedness, the vulnerability to higher unemployment and borrowing costs of the capacity of some households to service debts, and the potential for buy-to-let investors to behave procyclically, amplifying movements in the housing market.
- Subdued growth in the global economy, including the euro area, which could be exacerbated by a prolonged period of heightened uncertainty.
- Fragilities in financial market functioning, which could be tested during a period of elevated market activity and volatility.
The report notes that there will be a period of uncertainty and adjustment following the result of the EU referendum. The UK needs time to establish new relationships with the EU and the rest of the world, with some market and economic volatility to be expected as this process unfolds.