UK banks have made several improvements since the last financial crisis, which means they can now fail safely, the Bank of England says:
- holding more loss absorbing capacity;
- being able to monitor liquidity needs and mobilize liquid resources throughout resolution;
- ‘resolution-proofing’ contracts and critical service arrangements to enable continuity through resolution;
- changes to group structure to keep banks open and operating in a resolution;
- the ability to plan at speed for further restructuring changes to return the firm to long-term viability; and
- greater planning for communications in a resolution to ensure public confidence is maintained.
European stock markets have dropped this morning, as economic anxiety hits stocks.
The UK’s FTSE 100 is down for the fourth day running, losing 63 points or 0.8% to 7413 points.
Germany’s DAX has lost 1%, while Italy’s FTSE MY B has shed 1.8%.
Investors fear that the eurozone economy will stumble, after the European Central Bank’s said yesterday it plans to raise interest rates in July and September.
RichardHunter, head of markets at interactive investor, says:
“There is little respite at present from inflationary concerns, giving investors little room for manoeuvre in navigating the darkening economic clouds.
The European Central Bank signaled its intention for an interest rate rise next month, coupled with a downgrade to growth forecasts. With the ECB now joining the clutch of central banks in tightening mode, the specter of stagflation looms large once more as investors seek refuge from the gathering storm.
The latest employment data adds to signs that the UK recovery is slowing, as firms struggle to hire staff.
British employers added staff in May at the slowest pace since early 2021, according to a regular survey by accountants KPMG and the Recruitment and Employment Confederation (REC).
Their index of permanent staff hiring fell for a sixth month of 59.2 from 59.8 in April – showing slowing growth (but above the 50-point mark showing stagnation).
Temporary staff hiring in May also fell to its lowest since early last year.
Neil Carberrychief executive of the RECsays it’s still a “a hugely positive jobs market” for people looking for work.
While the pace of growth has dropped after a stellar first quarter, by any normal measure there are still lots of vacancies out there, offering improved wages. For companies, they emphasize again that hiring is a challenge in this market, and getting it right matters – the help of professional recruiters will be vital. The market for temporary work is stabilizing faster than for permanent staff, which could suggest a little caution creeping into employers’ thinking in the face of high inflation.
“But compared to pre-pandemic, labor supply is still the big issue we have to solve. With over half a million people missing from the jobs market, and demand still growing strongly, this is a big, strategic issue for the UK. Growth is essential to funding public services and paying higher wages sustainably. Any plan for growth must include action to help people into work from inactivity, skills reform, support for innovation on productivity and targeted immigration reform.”
The UK has fixed its problem of having banks which are simply too big to fail, says Dave Ramsden, Deputy Governor for Markets and Banking at the Bank of England.
But the BoE also cautions that “resolvability is a spectrum”, and banks need to maintain their preparations, and keep testing them.
“The Resolvability Assessment Framework is a core part of the UK’s response to the global financial crisis, and demonstrates how the UK has overcome the problem of ‘too big to fail’.
The UK authorities have developed a resolution regime that successfully reduces risks to depositors and the financial system and better protects the UK’s public funds. Safely resolving a large bank will always be a complex challenge so it’s important that both we and the major banks continue to prioritize work on this issue.”
Germany’s central bank has slashed its growth projections for the German economy.
The Bundesbank also predicted sharply higher inflation, as households are hit by soaring food and fuel price, hitting confidence and purchasing power.
The German central bank now sees prices rising by 7.1% in 2022, well above the 3.6% projected in December. Inflation is expected to be high in 2023, too — with the forecast raised to 4.5% from 2.2%.
But GDP is only expected to rise by 1.9%, less than half of the 4.2% it predicted in December, reflecting the impact of the Ukraine war on Europe’s largest economy.
Growth in 2023 was cut to 2.4% from 3.2%.
Bundesbank President Joachim nagel warned that German inflation will be the highest in decades:
“Inflation this year will be even stronger than it was at the beginning of the 1980s,”
“Price pressures have even intensified again recently.
The Bundesbank also warns that Germany’s economy would shrink sharply if Russian energy supplies were cut off:
The Bundesbank has, in addition, calculated an alternative risk scenario which includes a cessation of Russian energy supplies. In this scenario, economic activity could experience a pronounced decline in 2023.
Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.
The UK’s top banks are no longer ‘too big to fail’, but three of its major lenders need to take steps to improve shortcomings.
That’s the verdict from the Bank of England this morning, as it publishes its assessment of how failing lenders could be dismantled in a crisis without needing taxpayer handouts.
The BoE has found that if a major UK bank failed today it could do so safely: remaining open and continuing to provide vital banking services to the economy.
Shareholders and investors, not taxpayers will be first in line to bear the costs, overcoming the ‘too big to fail’ problem.
This verdict follows years of work, creating a resolution regime to handle a failed bank – something that didn’t exist in 2007-08 when the credit crunch led to the collapse of Wall Street bank Lehman Brothers.
That meant UK 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 BoE says:
The Bank’s assessment of resolvability shows that even if a major UK bank were to require resolution, customers would be able to keep accessing their accounts and business services as normal.
But, the BoE has also identified shortcomings at HSBC, Lloyd’s banking Group and standard chartered over their resolution plans.
All three have pledged to make improvements.
Also coming up today
Investors are nervously awaiting May’s US inflation report, due at 1.30pm BST. It’s likely to come in around April’s 40-year high of 8.3%.
ipek Ozkardeskayasenior analyst at swissquote bankfears we could see a ‘bad surprise’:
The positive pressure on food and energy prices and the unexpected uptick in secondhand 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 softer inflation read on the other hand, would resuscitate hope that inflation has peaked two months ago, and the worst is behind.
Russia’s central bank sets interest rates, and could lower them again from 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’s semi-annual forecast
- 7.30am BST: China vehicle sales for May
- 9.30am BST: ONS report on ‘worries about the rising costs of living’
- 11.30am BST: Central Bank of Russia interest rate decision
- 1.30pm BST: US inflation report for May
- 3pm BST: University of Michigan’s US consumer sentiment report
George is Digismak’s reported cum editor with 13 years of experience in Journalism