The Bank of England has cautioned lenders that they need to keep a close eye on commodities and private credit to avoid financial problems.
Speaking at a UK Finance event, Nathanaël Benjamin – who is responsible for authorising the UK arms of international banks – warned there were a range of dangers facing banks.
Benjamin warned that climate change could see commodities market “change drastically”.
“Risks from climate change will make their way to banks and their balance sheets in fiendishly unpredictable ways,” Benjamin said.
He said this could occur through businesses banks lend to, the assets they hold as collateral or the securities they invest in.
“All banks, commodities house or otherwise, need to be up to the task of identifying those connections pro-actively, and anticipating when and where these risks could emerge, because ultimately when they crystallise for the broader economy, they crystallise for banks too,” Benjamin said.
He also said banks should be “very careful” around private equity, warning “the impact of consensus breakdown on credit markets could be significant”.
He said it was important for firms to be aware of the “hidden risks” they face. Firms generally underestimate their exposure, both direct and indirect, to counterparties and connected collateral.
Recently the Bank launched its first system-wide stress test to explore the connections between banks and the broader financial sector.
Looking forward, Benjamin said that a rising rate environment will likely challenge banks’ business models, tempting them to move into new opportunities.
While Benjamin admitted economic dynamism required innovation, he warned there was risk where plans were “not sufficiently thought through or executed carefully”.
“Firms need to ensure that their business as it currently exists is operationally resilient before growing or changing significantly, before venturing into new products or markets,” he said.
“And firms should plan for such growth with open eyes and a healthy dose of scepticism about the latest fad, lest they join the annals of firms that have over-extended themselves in the pursuit of growth.”