These are the five biggest threats to UK

financial stability right now

Bank of England policymakers have revealed what
they think are the biggest threats to the UK.
Here are the top five
By Szu Ping Chan
10:17AM GMT 01 Dec 2015
http://www.telegraph.co.uk/
The Bank of England has published its latest Financial
Stability Report,which evaluates the threats to UK financial
stability and the wider economy.
Policymakers signalled that the Financial Policy Committee
- which polices risks in the financial system - could force
banks to build up more capital in the good times in order
to cover losses on loans during a downturn.
The FPC said it expects the "counter-cyclical buffer" to be
set at 1pc of a bank's risk-weighted assets in the future.
Risk-weighted assets are a bank's total loans and
securities adjusted for how risky they are.
It also identified a number of threats facing the UK. Here
are five of the biggest:
1. House prices and the buy-to-let market
While the FPC stopped short of recommending new curbs
on Britain's housing market, it warned that "strong growth
in buy-to-let lending may have implications for financial
stability".
Policymakers noted that growth in mortgage lending had
been largely driven by the buy-to-let market, while total
buy-to-let lending, including new loans and remortgaging,
was on course to hit its pre-crisis peak if it continued to
grow at the current rate.

The FPC noted that total

buy-to let lending was close to its pre-crisis peak Photo:
Bank of EnglandThe Treasury is expected to launch a
consultation before the end of this year with a view
to giving the FPC extra powers to police the buy-to-let
market.
The FPC said landlords could be more sensitive to
increases in interest rates than owner-occupiers.
It said if mortgage rates rose by3 percentage points,
almost 60pc of buy-to let borrowers would see their rental
income no longer covering 125pc of their interest
payments, compared with just 4pc of owner-occupier
borrowers who would see their mortgage debt costs rise
to above 40pc of income, a level at which the FPC judges
would make it more difficult for households to repay their
mortgages.

With interest rates more

likely to go up than down, the FPC warned that landlords
could be more sensitive to tighter monetary policy than
households Experts have warned that thousands of
people will rush to snap up buy-to-let properties ahead of
a 3pc stamp duty hike next April for owners of multiple
properties
announced
at
last
month's Autumn
Statement.
Landlords had already been hit by a reduction in the
amount oftax relief enjoyed by landlords to the basic
rate, which currently stands at 20pc.
Prices in the UK commercial real estate (CRE) market have
risen significantly and the funding of investments is
becoming riskier"

Photo: Bank of England

The FPC said a "severe downturn" in the market could

"reduce the ability of some firms to access bank finance,
given their use of commercial real estate as collateral". Its
assessment of the market showed that, while the overall
commercial property market was "fairly valued" overall, it
described some parts of the market, particularly prime
West End office space, as "overvalued".
2. Emerging market risks
The FPC warned that the UK financial system had
"substantial exposures to emerging market economies"
including through direct lending to households and
businesses.
It noted that a "further downgrade to GDP growth
prospects, capital outflows and currency depreciations
have all acted to increase the burden of servicing elevated
levels of emerging market economy debt".

Photo: Bank of England

Bank data show direct UK bank claims on China, Hong
Kong and other emerging market economies stood at
around 340pc of common equity Tier 1 - a key measure of
capital against a bank's balance sheet - in the second
quarter of this year - or $1.2 trillion (800bn).
It also noted that in a "number of countries", businesses
had issued a "large volume of US dollar-denominated

debt", which made them more sensitive to the exchange

rate movements that could be triggered by a US rate rise.
The International Monetary Fund (IMF) recently warned
that higher US interest rates could trigger a wave
of corporate defaults in emerging markets.
However, policymakers were more confident that UK
banks could handle acrash in China and emerging
markets, with its stress tests results suggesting the
system "could maintain its core functions in a severe
stress scenario".
The Bank recently said emerging market risks and
the likelihood that inflation would remain below 1pc
well into next year meant that interest rates could
remain lower for longer.
3. 'Fragile' financial markets
Higher US interest rates could also trigger an evaporation
in market liquidity, policymakers warned on Tuesday.
The Bank noted that some markets "appear to have
become more fragile, as evidenced by episodes of shortterm volatility and illiquidity over the past couple of
years". Last October's "flash crash" in US Treasuries, which
is considered the most liquid market in the world, and this
summer's move by the People's Bank of China to devalue
the yuan, are examples of this.
It said:
Despite such periods of intense volatility, there is
evidence that market and liquidity risks may not be fully
reflected in the prices of some financial assets. It is
important that market participants recognise the
underlying risks in different asset classes, and price them
accordingly.

4. Britain's current account deficit

The UK's current account deficit hit a record high of 5.1pc
of gross domestic product (GDP) in 2014.
The current account deficit is the difference between the
amount of goods, services and payments the UK sends to
the rest of the world and the amount coming in. In short, it
is the difference between the amount of money flowing in
and out of the UK.
While it has since narrowed, the FPC noted that the deficit
remained "high by historical and international standards".

It
said
a
"persistent
current account deficit could lead to a sudden adjustment
in capital flows" if investors pulled their cash out of the
UK, prompting a fall in the pound that would have
"adverse consequences for UK financial stability".
Ben Broadbent, the Bank's deputy governor for
monetary policy, said this year that policymakers were
monitoring the risk that Britain's referendum on
its membership of the European Union could make it
harder for the country to finance the current account
deficit.
It's clear that in an open economy like this one,
particularly one which happens to have at the moment a
large current account deficit, inflows of FDI (foreign direct

investment) and portfolio investment are an important,

stable way of financing that.
5. Cyber risks
Policymakers described cyber attacks "a serious and
growing threat to the resilience of the UK financial
system".

Worries about cyber risks

have increased Photo: Bank of EnglandAccording to the
Bank's latest systemic risk survey, the proportion of top
banks and financial services companies that now believe
cyber risk is a "key concern" climbed to 46pc in the
second half of this year, from 30pc in the first half and
10pc a year ago.
The risk was no longer a "narrow 'technology' issue", they
warned, and urged companies "to build their resilience to
cyber attacks, develop the ability to recover quickly from
attacks, and ensure effective governance which means
viewing cyber risk as a strategic priority".
Andrew Bailey, the deputy governor of the Bank of
England, recentlywarned that cyber threats could
never be defeated because they were constantly
evolving.
Minutes of the latest meeting of the Bank's Court of
Directors revealed that it had launched fake attacks on

staff in order to raise awareness of so-called "phishing"

scams. It also noted risks around staff revealing their Bank
roles through social media such as Twitter and Facebook.