U.K. More Vulnerable to Financial Shocks Than Most, BOE Says
The U.K. is more vulnerable to financial shocks than most other nations, a Bank of England study concluded, indicating that openness to trade and banking poses some risks.
Britain has more foreign assets and liabilities than any other major economy and relies on trade for 60% of its gross domestic product, more than the average across other industrial nations, according to the paper by five officials at the central bank.
The researchers concluded that developments abroad accounted for half the change in GDP and almost all the variation in financial conditions between 1997 and 2019. It’s a reminder that the City of London’s banking sector because of its size can feed turmoil in markets into the U.K. economy more quickly than in other countries.
“Openness could be a double-edged sword,” the researchers wrote in a paper published in the BOE’s quarterly bulletin on Friday. “The openness brings many benefits but also means that events abroad can significant affect both the outlook for the U.K. economy and the resilience of the financial system.”
The paper covered the period thorough the global financial crisis a decade ago, when a credit crunch in the U.S. mortgage market tightened borrowing conditions worldwide. The U.K. eventually was forced to nationalize institutions like Northern Rock and Royal Bank of Scotland as a result.
The paper also found that:
- The U.K. is most affected by developments in the euro area and the U.S.
- Where direct links are small, as in China, “spillovers can be material” spreading through indirect channels
- U.K.-based banks’ foreign claims are 60% higher than those in the U.S. and 20% higher than those in France
- A third of U.K. corporate borrowing comes from overseas markets
- The paper was written by Ambrogio Cesa-Bianchi, Rosie Dickinson, Sevim Kosem and Simon Lloyd of the BOE’s International Directorate along with Ed Manuel of the Financial Stability Strategy & Risk Directorate
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