These are the four biggest threats to financial stability, according to the Bank of England

 
Jessica Morris
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Greece is a potential flash point to financial stability (Source: Getty)

The financial policy committee (FPC) which looks after financial stability over at the Bank of England, has outlined the areas it intends to keep a closer eye on in its quarterly assessment released today.

1. Geopolitical turmoil

Eurozone turmoil could pose a threat to future financial stability. There have been some encouraging signs recently but the risk of a prolonged period of low growth remains, the FPC said. Additionally, ongoing negotiations between Greece and its creditors could also be a trouble spot.

Another potential sore spot flagged by the Bank was the trend toward diverging monetary policy worldwide. While the United States is gearing up to raise its main interest rate, most countries are busy cutting theirs. This exacerbates risks "associated with a further slowdown in China and to some emerging economies".

"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," the committee said.

2. Market liquidity

A global liquidity crisis could also jeopardise the stability of the financial system, the committee warned. Liquidity is the degree to which investors are able to buy or sell a particular asset, without affecting its price. And a serious lack of it would mean sudden shocks could cause global markets to go into meltdown.

"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 committee said.

"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."

3. Cyber security

Threadneedle Street also said, as geopolitical tensions rise, banks must pay more attention to cyber security.

"In an environment of geopolitical tension, the committee remains concerned about the need for core firms and financial market infrastructures to address their resilience to cyber attacks," it said.

4. Domestic risks

Britain's housing market, which was the main focus last year, took a back seat amid international concerns. However, the financial policy committee said it was still keeping an eye on Britain's current account deficit, which widened to six per cent of gross domestic product in the third quarter.

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