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HIGHLIGHTS-Bank of England's Carney speaks on UK banking risks
November 30, 2016 / 7:55 AM / in a year

HIGHLIGHTS-Bank of England's Carney speaks on UK banking risks

LONDON, Nov 30 (Reuters) - Bank of England Governor Mark Carney was speaking on Wednesday after the BoE said Royal Bank of Scotland will have to bolster its capital holdings.

The BoE also said the financial system faces a “challenging” outlook due to risks posed by leaving the European Union and other factors including the recent U.S. election.

Following are comments made by Carney at a news conference:

CARNEY ON BANK STRESS TESTS

“Taking the results of the stress test and these plans into account, the FPC judged that, in aggregate, the banking system is capitalised to support the real economy even under a broad, severe and synchronised stress scenario. As a result, the FPC did not require any system-wide macroprudential actions on bank capital.”

RBS’ STRESS TEST FAILURE

“That institution (RBS) has made a lot of progress over the last several years, particularly around its core business franchise.”

“Its challenge is that it still has legacy issues associated with that. There’s misconduct costs, there’s impaired assets, they’re still working through the so-called non-core assets on which they have made progress.”

“They have made progress over the course of the year, they have identified and made an announcement today about additional actions they will be taking.”

“To be clear they’re not talking about raising capital, they’re talking about reducing certain types of assets and increasing capital through other activities as oppose to going out and raising capital.”

“I will say that the orders of magnitude of their plans, what they can realise from their plans, are much bigger than the size of the short fall in the stress test.”

GLOBAL RISKS, CHINA

”The most significant risks to UK financial stability are global. Growth in China is increasingly reliant on rapid credit expansion. Since the global financial crisis, Chinese non-financial sector debt has risen by around 100 percentage points relative to GDP, and currently stands at 260 percent of GDP.

“This is extraordinary leverage for an advanced, let alone, an emerging economy. There are signs that capital outflows from China and other emerging economies have begun to pick up in recent months and may accelerate further depending on the degree and pace of increases in US market interest rates.”

UK CURRENT ACCOUNT DEFICIT

”One channel by which global risks could affect UK financial stability is via the current account. At 5.9 percent of GDP, the UK current account deficit remains large by historical and international standards, and its smooth financing depends on foreign investor appetite for UK assets.

“A sharp adjustment to capital inflows could test financial stability by tightening financing conditions for the real economy, adding pressure on the currency and worsening the trade-off between growth and inflation.”

BREXIT, THE EURO ZONE AND BANKS

”In some euro-area economies, sovereign debt positions remain vulnerable to higher borrowing costs and weaker growth prospects that could be associated with trade or political risks. Moreover, challenges to the resilience of parts of the euro-area banking system remain.

”Additional risks to the euro area could emerge as a consequence of the UK’s withdrawal from the European Union. Banks located in the UK supply over half of debt and equity issuance by continental firms, and account for over three quarters of foreign exchange and derivatives activity in the EU.

“If these UK-based firms have to adjust their activities in a short time frame, there could be a greater risk of disruption to services provided to the European real economy, some of which could spill back to the UK economy through trade and financial linkages.”

BREXIT CLARITY FOR UK FIRMS

“It is preferable that firms know as much as possible about the desired endpoint, what type of relationship would be there, and as much as possible, as early as possible, about the potential path to that endpoint.”

“Having a degree of clarity, when appropriate, will help promote a smooth and orderly transition.”

“I would stress that it’s still very early days... Article 50 has not yet been triggered. The timing of those plans and the point at which firms would need to put them into action is still some way off.”

UK AS “INVESTMENT BANKER FOR EUROPE”

“It is important to recognise that the United Kingdom is effectively the investment banker for Europe.”

“More than half the equity and debt raised is raised in the United Kingdom by firms based in the United Kingdom, quite often to investors based in the United Kingdom.”

“It’s absolutely in the interest of the European Union that there is an orderly transition and that there is continual access to those services.”

POTENTIAL U.S. TRADE POLICY CHANGE

“There is this possibility that the slow down in the growth in world trade, which we have seen over the past few years, accelerates because of discrete policy initiatives potentially from the world’s largest economy.”

“And while that might not directly affect the United Kingdom if it slows the pace of global growth - and we’re an open trading nation one of the most open nations in the world - it’s going to have a knock-on effect through this economy.”

“This is more of a slow burn issue, sand in the gears, headwind for the global economy as oppose to a sharper shock if any of it were to actually materialise.”

EXPOSURE TO ITALY

“There’s some well-known, some well-documented issues there. The exposure of UK banks to the Italian banks is very low.”

“So exposure to the (Italian) banks extremely low, exposure to Italy very manageable.” (Reporting by UK bureau)

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