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Financial Market Stress Adding Risks to the UK Economic Outlook

During the global financial market turmoil over the past week, UK bank stocks have taken a hit. If prolonged, the market turmoil would weigh on the UK economic outlook. Continued widespread stresses in the financial sector would weaken confidence and tighten credit conditions. The heightened volatility in financial markets around the world follows the collapse of Credit Suisse and SVB Financial Group, including its UK arm, among other mid-sized US banks.

We currently expect the effects on the UK from the stresses in financial markets to be contained. Confidence in the banking system is key. In the UK markets should be reassured by the resilience of the UK banking sector and by the Bank of England's (BoE) readiness to act. This readiness was recently proved in September last year when the BoE responded promptly to liquidity pressures in the financial sector. Moreover, following the Swiss authorities decision to write down Credit Suisse's AT1 instruments, the BoE has confirmed the creditor hierarchy in the UK’s bank resolution framework, in which AT1 instruments rank ahead of equity (CET1). This seniority was applied in the resolution of SVB UK. Nevertheless, market volatility can persist and contagion fears can still take hold. In a scenario of prolonged financial stress, we would expected (1) a weakening in consumer and investor confidence affecting consumption and investment, and (2) a tightening in credit conditions if banks reduce lending..

“The market turmoil that we are currently seeing adds to the risks to the UK economic outlook and this is why maintaining confidence in the banking system is key,” said Adriana Alvarado, Senior Vice President in the Global Sovereign Ratings Group.