Firms must 'prepare' for global financial market shocks, Bank of England warns (original) (raw)

On a global scale, uncertainty about the geopolitical environment and the outlook for the economy remains elevated

Global financial markets are vulnerable to shocks, the Bank of England has warned

The Bank of England has issued a warning about global financial markets being at risk to shocks after a "spike in volatility" during the summer.

However, they reassured that the UK banking system is robust enough to endure tougher economic conditions and continue to support households and businesses. The Financial Policy Committee (FPC) stated in its newest report that risks to UK financial stability haven't really changed since their last overview in June.

Nonetheless, worldwide uncertainty tied to geopolitical tensions and economic prospects remains high. This announcement comes as tensions escalate in the Middle East, with Israel initiating ground operations in Lebanon this week.

The FPC highlighted a "short-lived spike in volatility and falls in equity indices across global financial markets in early August", spurred by underwhelming news such as lacklustre job figures from the US and disappointing financial performances from tech companies specializing in artificial intelligence.

But following this, the release of favourable macroeconomic updates led most asset prices to quickly return to "stretched" levels. According to the report, "Markets remain susceptible to a sharp correction, which could affect the cost and availability of credit to UK households and businesses, with investors sensitive to short-term developments in a challenging global risk environmen." Businesses and banks are advised to be "prepared" for "severe but plausible stresses".

Meanwhile, the committee noted that while mortgage-holders are proving to be quite resilient in the face of soaring interest rates, with the costs of home loan deals beginning to decrease, it pointed out that some of the lower-income households and renters are still feeling the pinch. A significant chunk—about one third—of those with mortgages haven't switched over to deals with higher interest rates yet.

In addition, despite UK businesses showing a decent level of resilience amidst deteriorating economic conditions, there remains a level of concern for "pockets of vulnerability", particularly among private equity-backed companies and small to medium-sized enterprises (SMEs). Insolvency cases are reportedly more frequent among small businesses operating in sectors prone to difficulty, such as construction, wholesale and retail trade, as well as accommodation and food services.