The outlook for the global economy is “highly uncertain”, a top Bank of England official has warned Bristol business leaders, but he insisted that Britain’s financial services industry is in far better shape to cope with any sudden shocks than it was ahead of the last recession.
China’s huge debt problem, Brexit and complacency over risk among some UK lenders were all factors that could impact on the economy, Alex Brazier, the Bank’s financial stability strategy and risk executive director said yesterday on a visit to the city. 
But tough new stress tests on Britain’s banking sector put in place over recent years meant it could weather the economic storm clouds, he said.
“We have made the financial system a heck of a lot stronger than it was 10 years ago,” he told the event, organised by Business West and the Bank and staged at investment group Hargreaves Lansdown’s Bristol HQ.
“We spend a lot of our time asking what could happen. We look at things like a property market crash,and recession in china. We need to make sure Britain’s banks can cope.”
The result was that the banking sector was now “three or four times stronger” than it was 10 years ago when Lehman Bros collapsed and the world stood on the brink of an unprecedented financial meltdown.
“Ten years ago we got to a position when the cash points nearly ran out of money,” he said.
Nobody had forecast that problems in a small, almost unknown section of the US economy – the subprime mortgage market – could trigger a global financial crisis that led to $2 trillion losses, he added, pointing out that 11 years ago his job did not exist and no one was stress testing the banks to the extent they are now.
RBS, the biggest bank failure of the global crash, had “absolutely no capital” to absorb the shocks from the fallout, he told the gathering.
“It was so obvious,” he said, adding that light-touch regulation of the banking sector at that time had meant no one in RBS had asked the right questions.
The result is that the wider UK economy is now 15% behind where it would have been had the financial crash not happened.
He said the crisis had been caused by “a very small group of very well-paid people in one part of the country” yet its impact had been felt by everyone, with the cost to every man, woman and child in the UK some £3,700 each.
In Bristol 8,000 more people lost their jobs due to the financial crisis, he said. And 3,000 of them are still unemployed.
His job was not just to make sure that the banks were capitalised sufficiently to absorb any shocks, but to make sure they could do so by a wide margin.
Using the analogy of a bridge during a storm, Mr Brazier – who is also a member of the Bank’s financial policy committee – said his job was to “not just keep it upright but to keep the traffic moving over it as well”.
Such stress tests had not proved popular with all senior figures in the sector, he admitted. “One chief executive of a major bank said our stress tests were unsporting, so we know we are getting them right.”
These tests were now looking at the economic clouds on the horizon, among them China’s massive indebtedness, the impact of Brexit and what he called complacency among some lenders which was making credit easier.
The emergence of Chinese debt was the biggest change in the world economy over the past decade, he said, and he was now looking at how a hard landing of the Chinese economy could have on the UK.
“Our banking sector is closely linked to that of China and Hong Kong. The clue is in some of the names,” he said.
Another cause of uncertainty was the impact of Brexit on the UK financial sector – although he said this was not one of the largest risks.
He had to make sure Britain’s banks were prepared – for example 10% of corporate lending comes from banks in EU countries and 8% of insurance contracts are written by EU insurers.
There was also growing complacency among some lenders, he said, with signs of a growing perception that risks were now lower. Interest-free periods on some credit cards had increased from 15 months to 30 while some interest rates had fallen from 8% to 3.8% even though the main Bank rate had not changed and average household income growth was around 1.5%.
He was now asking these lenders to ensure they were resilient enough to absorb any shocks. While it was not his aim to change the behaviour of lenders, by carrying out stress tests and pointing out gaps they often made changes.
At the same time the message had got across to the banks that if anything went wrong it would be their shareholders who would foot the bill, not the rest of the economy.
“The view that the State will bail you out has gone now,” he said. “If it’s your money on the line you tend to understand things better.”
