UK banks have made several improvements since the last financial crisis, which means they can now safely fail, according to the Bank of England:
- hold more loss-absorbing capacity;
- be able to monitor liquidity needs and mobilize liquid resources throughout resolution;
- “resolve-proof” contracts and critical service agreements to enable continuity until resolution;
- changes to group structure to keep banks open and operational in resolution;
- the ability to quickly plan further restructuring changes to return the business to long-term viability; and
- greater communications planning in a resolution to ensure continued public trust.
European stock markets fell this morning as economic anxiety hits stocks.
UK’s FTSE 100 is down for the fourth consecutive day, losing 63 points or 0.8% to 7413 points.
germany DAX lost 1%, while Italy FTSE MIBs lost 1.8%.
Investors fear the eurozone economy may stumble, after the European Central Bank yesterday announced plans to raise interest rates in July and September.
Richard Hunter, market manager at interactive investor, said:
“There is little respite right now from inflationary concerns, giving investors little leeway to navigate the darkening economic clouds.
The European Central Bank has signaled its intention of raising interest rates next month, coupled with a downward revision of growth forecasts. With the ECB now joining the clutch of central banks in tightening mode, the specter of stagflation once again looms as investors seek refuge from the brewing storm.
The latest jobs data adds to signs of a slowing recovery in the UK as businesses struggle to hire staff.
British employers took on staff in May at the slowest pace since early 2021, according to a regular survey by accountants KPMG and the Confederation for Recruitment and Employment (REC).
Their permanent staff hiring index fell for a sixth month to 59.2 from 59.8 in April – showing slowing growth (but above the 50 point mark showing stagnation).
Hiring of temporary staff in May also fell to its lowest level since the start of last year.
Neil Carberrygeneral manager of the RECsays it’s still an “extremely positive job market” for people looking for work.
Although the pace of growth has slowed after a bumper first quarter, by any normal measure there are still plenty of vacancies, offering better wages. For companies, they again stress that hiring is a challenge in this market, and that it is important to get it right – the help of professional recruiters will be vital. The temporary labor market is stabilizing faster than that of permanent staff, which could suggest a little caution in the thinking of employers in the face of high inflation.
“But compared to the pre-pandemic period, labor supply remains the big problem we need to solve. With more than half a million people absent from the labor market and demand still growing strongly, this is a major strategic issue for the United Kingdom. Growth is essential to fund public services and sustainably pay higher wages. Any plan for growth must include actions to help people get out of the labor force, skills reform, support for productivity innovation and targeted immigration reform.
The UK has solved its problem of having banks that are simply too big to fail, says Dave Ramsden, Deputy Governor for Markets and Banking at the Bank of England.
But the BoE also warns that “resolvability is a spectrum”, and that banks must maintain their preparations and continue to test them.
“The Resolvability Assessment Framework is a central part of the UK’s response to the global financial crisis and shows how the UK has overcome the ‘too big to fail’ problem.
UK authorities have developed a resolution regime that successfully reduces risks to depositors and the financial system and better protects UK public funds. Solving a big bank securely will always be a complex challenge, so it is important that we and the big banks continue to prioritize work on this issue.
The German central bank has reduced its growth projections for the German economy.
The Bundesbank also predicted a sharp rise in inflation as households were hit by soaring food and fuel prices, affecting confidence and purchasing power.
The German central bank now sees prices rising 7.1% in 2022, well above the 3.6% projected in December. Inflation is also expected to be high in 2023 – with the forecast raised to 4.5% from 2.2%.
But GDP is expected to rise only 1.9%, less than half of the 4.2% forecast in December, reflecting the impact of the war in Ukraine on Europe’s largest economy.
Growth in 2023 has been reduced to 2.4% from 3.2%.
federal bank President Joachim Nagel warned that German inflation would be the highest in decades:
“Inflation this year will be even higher than it was in the early 1980s,”
“Pricing pressures have intensified further recently.
The Bundesbank also warns that the German economy would contract sharply if Russian energy supplies were cut off:
The Bundesbank has also calculated an alternative risk scenario which includes a cut in Russian energy supplies. In this scenario, economic activity could decline sharply in 2023.
Hello and welcome to our ongoing coverage of business, the global economy and financial markets.
The UK’s major banks are no longer “too big to fail”, but three of its major lenders need to take action to close their gaps.
That’s the verdict from the Bank of England this morning, as it publishes its assessment of how failing lenders could be broken up in a crisis without the need for taxpayer relief.
The BoE found that if a major UK bank failed today, it could do so safely: by staying open and continuing to provide vital banking services to the economy.
Shareholders and investors, not taxpayers, will bear the costs first, overcoming the “too big to fail” problem.
This verdict follows years of work, creating a resolution regime to manage a failing bank – something that did not exist in 2007-08 when the credit crunch led to the collapse of Wall Street banking. Lehman Brothers.
This meant that Britain’s banks either had to be rescued with taxpayers’ money in 2008 (as happened with Royal Bank of Scotland and Lloyds) or collapse, causing huge disruption.
The Bank’s assessment of resolvability shows that even if a major UK bank were to require resolution, customers could continue to access their accounts and business services as normal.
But the BoE has also identified shortcomings in HSBC, Lloyd’s Banking Band and Standard Accredited on their resolution plans.
All three pledged to make improvements.
Also coming today
Investors are nervously awaiting the May US inflation report, due at 1.30pm BST. It is likely to hit April’s 40-year high of 8.3%.
Ipek Ozkardeskayasenior analyst at Swissquote Bankafraid to see it as a ‘nasty surprise’:
The positive pressure on food and energy prices and the unexpected rise in used car prices in May could prevent the index from easing for a second consecutive month.
A stronger than expected inflation figure would revive the Federal Reserve hawks and eventually push the S&P500 below the 4000 mark before the weekly closing bell. A weaker inflation reading, on the other hand, would rekindle hopes that inflation peaked two months ago, and the worst is behind it.
Central Bank of Russia fixes interest rates and could lower them again by 11% to 10%, while the UK’s Office for National Statistics publishes a report on the rising cost of living.
- 7.30am BST: German Bundesbank half-year forecast
- 7.30am BST: Vehicle sales in China for May
- 9.30am BST: ONS report on ‘concerns over rising cost of living’
- 11:30 BST: Central Bank of Russia interest rate decision
- 1.30pm BST: US inflation report for May
- 15:00 BST: University of Michigan US consumer sentiment report