Tariffs could destabilise UK financial system, Bank of England warns
President Donald Trump’s global trade war is likely to destabilise the UK’s financial system, but the Bank of England has said banks will be able to cope with the shocks.
The Bank’s policymakers also warned that the break-up of global trade would lower resilience and depress growth.
The Financial Policy Committee (FPC), which monitors risks within the UK’s financial system, said ongoing developments would be monitored closely as borrowers reliant on markets were threatened.
“A major shift in the nature and predictability of global trading arrangements could harm financial stability by depressing growth,” Bank officials said.
“A further risk was a reduction in global co-operation in tackling global challenges and shocks, which could reduce the resilience of the financial system.”
“As the UK is an open economy with a large financial sector, global risks are particularly relevant to UK financial stability,” they added.
President Trump’s sweeping tariffs sent markets into further turmoil on Wednesday.
Additional taxes on imports from China were also imposed, suggesting the global trade war could still deteriorate.
The Bank’s policymakers said that it had prepared for the current scenario playing out in markets across the world, with banks boasting “high levels of liquidity” according to minutes from FPC meetings in April.
“The FPC maintained its judgement that the UK banking system had the capacity to support households and businesses, even if economic and financial conditions were to be substantially worse than expected.”
Officials confirmed they were locked in discussions with major lenders as they said they would monitor the fast-developing changes.
The Bank’s policymakers said private equity firms were “particulalry exposed” to tighter financial policies as it called for greater transparency.
“A large proportion of UK market-based finance debt for PE-backed firms is from riskier sources.”
“Global uncertainty and higher economic risk could translate into tightened financing conditions for private equity-owned firms.”
“Higher rates and subdued economic growth could lead to increased refinancing challenges and reduced performance.
The FPC is currently running a “stress test” that will consider how UK banks respond to a recession, large falls in asset prices and higher global interest rates. It said its results will be published at the end of the year.
The policymakers also said they were responding to the Chancellor’s calls for the Bank to identify areas to boost growth, as they suggested regulations could be streamlined in the coming months.
Artificial intelligence tools could also be implemented to improve lagging productivity in the UK.
Governor Andrew Bailey said the technology would boost the UK economy in future years.
“The committee recognised that a likely area of development over the coming years was advanced forms of AI increasingly helping to inform firms’ core financial decisions.”
But it also pointed to the potential risks that may emerge from its rapid implementation, as AI could lead investors to “act similarly” in times of stress and exacerbate crises.
“Reliance on a small number of providers could lead to systemic risks in the event of disruptions to them,” the officials said.