UK financial system 'least resilient in the G7'

By agency reporter
November 15, 2017

Britain’s financial system is by far the least resilient of all the G7 major economies – and the threats posed by Brexit make it even more exposed to future shocks, according to a new report from the New Economics Foundation.

The report – Still Exposed: The UK’s Financial System in the Era of Brexit – measures G7 countries against a Financial System Resilience index, developed through expert roundtables, interviews and academic literature review. The index looks beyond simply how much capital banks are holding and measures countries against key factors influencing resilience, including diversity, interconnectedness, asset composition and complexity.

The UK scores 34.9 out of a possible 100 for financial system resilience, almost half the score of Italy – the next most resilient financial system in the G7. Germany has the most resilient financial system in the G7, with a score of 78.5.

Since 2015, when the New Economics Foundation last ran the index, the UK’s resilience has improved in some areas. But it still has the largest, most concentrated, complex and interconnected financial system in the G7, and is therefore highly vulnerable to future shocks. And with recent data suggesting levels of household debt will rise above 150 per cent of GDP by 2019, the UK’s relative lack of resilience to future shocks ought to be a major concern.

The report also forecasts the likely effect of different Brexit scenarios (hard Brexit, soft Brexit or a bespoke agreement) on the UK’s financial system. It finds that any outcome other than a ‘soft Brexit’ would pose significant risks to financial stability.

The New Economics Foundation makes four recommendations to improve the resilience of the UK’s financial system:

  • Avoid a race to the bottom on financial regulation: Slashing regulation will create a less resilient financial system and jeopardise the long-term social and economic health of the UK
  • The Bank of England should strengthen prudential and macroprudential regulation to mitigate risks posed by Brexit: This should involve increasing required capital levels for big, risky banks and examining other factors when assessing financial system resilience, including asset and liability composition
  • The Treasury should urgently review options for addressing the lack of diversity in the UK banking system: For instance, RBS could be transformed into a network of local or regional retail banks with a mandate to serve their local area
  • The Competition and Markets Authority should focus on diversity of provision in the banking sector, not just market share: Genuine competition requires a diversity of providers, not just more banks following the same business model.

Andrew Pendleton, Director of Policy and Advocacy at the New Economics Foundation, said, “The great financial crisis is still wreaking havoc through our politics and democracy and still costing households dearly. It’s deeply disturbing to see through this research how our system is still woefully exposed to shocks that could be even more cataclysmic.

“With the vast uncertainties of Brexit on the horizon, consumer debt rising, and wages failing to keep pace with inflation, just such a shock seems ever more likely. And our financial system is simply not ready for that.

“We need to see stronger regulation by the Bank of England to protect our financial system from over-exposure to risk. We also desperately need a more diverse banking system that invests in people, productivity and jobs and is responsive to the real needs of the different regions of the country.

“Above all, we must avoid a Brexit-induced race to the bottom on financial regulation. That way lies a disaster which could dwarf the financial crisis ten years ago.”

Read the report Still Exposed: The UK’s Financial System in the Era of Brexit here 

* New Economics Foundation http://neweconomics.org/

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