July 2015 – LONDON – The precarious position of Greece could pose a risk to the financial system, the Bank of England has warned, as it pledged to intervene to insulate the UK from potential shockwaves caused by any escalation in the eurozone crisis. Setting out its half-yearly assessment of the risks to the UK financial system, the Bank said the outlook remained unchanged over the last six months until the last few days, when Greece closed its banks and then failed to repay a €1.5bn (£1.1bn) loan to the International Monetary Fund. On Wednesday, the Bank said it had been working with the Treasury, the Financial Conduct Authority and European counterparts to put in place contingency plans to tackle the situation in Greece, which has crystallized in recent days but been a focus for policymakers for the last five years.
“The UK authorities will continue to monitor developments closely and will take actions required to safeguard financial stability in the United Kingdom,” the Bank of England governor, Mark Carney, said. He has attended Cobra meetings to discuss the Greek crisis and made prepations for a possible exit of Greece from the euro. The financial stability report was compiled after the latest quarterly meeting of the Bank’s financial policy committee (FPC), set up after the banking crisis to try to look for potential bombshells that could affect the UK’s financial stability. The FPC met last week – before Greece missed its crucial debt repayment – but at the time had regarded the risk from Greece to the financial system as “particularly acute.”
The Bank is concerned that the Greek situation could force investors to reconsider the risks of other investments they hold, which in turn could dry up liquidity in the markets, making it harder to buy and sell financial products. “The situation remains fluid and it is possible that a deepening of the Greek crisis could prompt a broader reassessment of risk in financial markets,” Carney said. With a referendum being called in Greece on Sunday to vote on austerity measures associated with the bailout, Carney said: “It’s important the consequences of the vote are known as much as possible in advance.”
The Bank of England found direct exposures of UK banks to Greece were very small, but exposures to peripheral eurozone economies was more significant, amounting to 60% of the major banks’ crucial capital ratios. Carney said the four Greek banks in the UK were “tiny” and indicated they had taken steps to hold more liquid assets. The Bank said officials were keeping “in close touch” with the Greek banks in the UK as well as HSBC which has operations in the country. In terms of China, Hong Kong and other emerging markets the exposure was even higher, at three and a half times the capital buffer. “A sharp slowdown in China would be likely to have significant spillovers to the global economy,” the Bank said. –The Guardian (excerpt)