The Bank of England was unable to give a stable outlook for the UK’s financial stability due to the ongoing Greek crisis, in its financial stability report today, saying the risks in relation to Greece and its financial needs “were particularly acute”.
Mark Carney, the Bank's governor, warned the outlook for financial stability has worsened, with contingency plans in place for Grexit.
He said the crisis could trigger a broader market adjustment, and will test market liquidity.
The report also stated that the situation in Greece had moved surprisingly quickly:
It judged the outlook for financial stability to have been broadly unchanged over much of the period since December but, as risks associated with Greece began to crystallise in recent days, the outlook had worsened.
The situation remains fluid. The Financial Policy Committee will continue to monitor developments and remains alert to the possibility that a deepening of the Greek crisis could prompt a broader reassessment of risk in financial markets
While the governor accepts that UK banks' exposure to Greece has been significantly reduced, he is concerned about contagion spreading to other countries, where banks are more exposed:
Events in Greece have tipped the balance – the outlook has worsened.
The footprint of Greek banks in the United Kingdom is tiny compared with the size of our economy. In contrast, our economic and financial exposure to the euro area is considerable, Carney said.
However, the report also suggested institutional changes and development of policy tools in the euro area since 2012, alongside economic recovery, a reduction of fiscal deficits in a number of other euro-area member states and the strengthening of banking systems have all contributed to a reduction in the risk of contagion.
Carney also said the European Central Bank had shown willingness to use all tools.
The report cited the UK’s current account deficit, the housing market, consequences of misconduct in the financial system and cyber-attack as the main risks facing the economy.
UK banks’ exposure in emerging markets and China is also “significant”, meaning the BoE will stay “alert to developments”.