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Dec 16 2014, 11.45am GMT


GBPUSD spiked as Mark Carney, governor of the bank of England addressed financial stability in the UK.

Mark Carney opened today’s speech on UK financial stability in an upbeat mode whilst taking risks into consideration. He said, “Over the past 18 months, the FPC [Financial Policy Committee]has been working systematically to address the most important risks to UK financial stability.”

He went on to discuss the role of British banks; “In 2013 we reinforced the capital position of major banks, encouraging them to raise £27bn of new capital. Alongside this, the FPC has developed the capital framework for UK banks. This year we have taken action to mitigate the biggest domestic risks, those related to housing.”

As he explained the risks further – oil price slump and a slowdown in global growth – the tone fell particularly regarding the domestic market and the recent EU stress test parameters on banks; “In the Bank stress scenario, balance of payments pressures induce sharp interest rate increases, a deep recession, rising unemployment and a 35% fall in house prices. For banks, mortgage and corporate loan impairments rise sharply. Funding costs rise. Over three years, bank profits are reduced by £90bn. This is a demanding test. It is certainly not a forecast. Nor is it a simple re-run of the recent financial crisis. Rather it is a coherent, tail-risk scenario, most similar to the early 1990s recession.”

Having seen an initial loss in the GBPUSD at the start of the speech with sterling dropping from 1.5666 to 1.5611, the pound spiked up to 1.5717 within 10 minutes. It has now leveled to the 1.57 mark.

This may have been due to positive statements such as, “The test results demonstrate that the core of the banking system has become significantly more resilient since the FPC’s 2013 capital exercise. Most importantly, the results suggest that the banking system is strong enough to continue to serve households and businesses during a severe shock.” Carney also pointed out the progress made by Lloyds and Royal Bank of Scotland in strengthening and de-risking balance sheets.

As he advocated the implementation of the regulatory framework, he stated, “This is proceeding well. UK banks have increased capital significantly over the last year and are transitioning towards greater resilience ahead of the regulatory timetable.”

When the executive summary was released, the tone was not so positive as a steam of risk-related scenarios and their effects on the UK economy were noted:

“The global economic outlook has weakened since the June 2014 Report and market concerns over persistent weak nominal growth and geopolitical risk have increased. These developments could affect the outlook for financial stability in the United Kingdom if concerns about persistent low growth lead to a sudden reappraisal of underlying vulnerabilities in highly indebted economies, or if a shift in global risk appetite triggers sharp adjustments in financial markets and undermines business and household confidence. The recent sharp fall in the oil price should support global and UK growth, but it also entails some risk to financial stability. Adjustments will be more disruptive if investors’ pricing of liquidity risk does not fully reflect structural changes in market liquidity. Such developments could lead to stress in funding markets for banks and corporates. In the Committee’s view, these global risks to the outlook for financial stability have increased since June.”

The UK100 [FTSE100], which had fallen 700 points from 5 December (6755) to yesterday (6065), regained 150 points this morning and is now leveling to the 6180 mark.

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