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Liquidity storm could throw UK into chaos, Bank of England warns
Bank of England warns that liquidity has become "more fragile", as it says threat of Greek default poses "significant risks" to the UK
The Bank of England has warned that a global liquidity storm could endanger financial stability if investors suddenly demanded their money back, adding that the threat of a Greek default posed "significant risks" to the UK.
The Financial Policy Committee (FPC), which is in charge of maintaining financial stability at the Bank, said liquidity - or the degree to which assets can be easily traded - may have become "more fragile" in some markets.
Policymakers, including Bank Governor Mark Carney, said they would work with the Financial Conduct Authority to assess whether asset managers could cope with a rapid change in market conditions.
"The Committee remains concerned that investment allocations and pricing of some securities may presume that asset sales can be performed in an environment of continuous market liquidity, although liquidity in some markets may have become more fragile," the FPC said following a meeting this week.
"Trading volumes in fixed income markets have fallen relative to market size and recent events in financial markets, including in US Treasury markets in October 2014, appear to suggest that sudden changes in market conditions can occur in response to modest news. This could lead to heightened volatility and undermine financial stability."
While the FPC has highlighted liquidity risks in previous meetings, members said the Bank would liaise with market participants to ensure they were "alert to these risks" and would "price liquidity appropriately and manage liquidity prudently".
Mr Carney warned last month that diverging monetary policies in the US, Britain, Europe, and Japan may set off further currency turbulence and "test capital flows across the global economy, including to emerging markets."
The FPC also said that tensions in Greece also posed a threat to the UK. "There also remain significant risks in relation to Greece and its financing needs, including in the near term," it said. The FPC said a further slowdown in China and the eurozone also posed risks.
"Any of these risks could trigger abrupt shifts in global risk appetite that in turn might lead to a sudden reappraisal of underlying vulnerabilities in highly indebted economies, or sharp adjustments in financial markets."
In a letter to Chancellor George Osborne, Mr Carney said risks to financial stability remained "elevated" and added that it would review UK bank capital rules that could result in lenders having to raise their buffers. Mr Carney said policymakers would pay particular attention to Britain's biggest banks.
Regulators will also study why liquidity in some fixed income markets has got smaller, amid accusations from banks that new tougher capital rules makes it too costly to hold large stocks of securities to trade.
The Bank will ask asset managers about their strategies for managing liquidity of their funds. "This would inform assessment of the extent to which markets are reliant on investment funds offering redemptions at short notice," the FPC said.
Separately, the FPC said it would apply to British banks' Hong Kong assets a recent decision by the Chinese city's regulators to set a counter-cyclical capital buffer of 0.625pc from January 2016.
The Bank said that risks to Britain from its housing market had not increased since its last report in December, but that steps it took last year to guard against overheating remained necessary.