The world is becoming more uncertain, but the Bank of England has the tools to meet increasing financial, macroeconomic and geopolitical challenges. That was the message from Sarah Breeden, the Bank’s executive director for financial stability, strategy and risk, in her keynote interview at the ACT annual conference on 16 May.
Breeden said that shocks are becoming “more common, bigger, and from a wider variety of places, but we have better visibility of some of these issues than others. We have the right tools. It's a question of trying to make sure that we have the visibility to point them in the right direction in advance of the shock arising”.
As a member of the Bank’s Financial Policy Committee, which has a primary responsibility to respond to threats to the financial system while ensuring conditions for economic growth, Breeden was keen explain how her work relates to that of corporate treasurers.
Describing herself as a “professional catastrophiser”, Breeden outlined the main threats that she and her team were attuned to: a cyber threat at the heart of the financial system, a big macroeconomic event in financial markets such as – at the time of speaking – a potential US government debt default, or geopolitical issues that she says “have become much more on my agenda since the experience of February last year”, a reference to Russia’s invasion of Ukraine.
Referring to the high interest rate environment, Breeden said that despite the dangers to highly indebted corporates, “we don't judge that to be likely to lead to financial instability. It's [more like] pockets of strain”.
“It's our job to make sure that the financial system, the household sector and the corporate sector can cope with higher rates without causing financial instability,” she said, all elements considered in the Bank’s stress tests and referenced in the Bank’s December 2022 Financial Stability Report.
Breeden said the key messages contained in the reports are relevant to all corporates, which she described as “our first line of defence”. Her lessons for treasurers included: “Be prepared, expect unexpected things that could really damage your business, and think through how you would manage them. The aim is to think through in the good times what might happen in the bad times, so that you can prepare and build resilience, in case those bad times occur.”
Key areas for consideration are how the economy makes an effective transition to net zero, about which Breeden said she recognises the importance of “greening the future economy”, but not one that requires cutting off finance to currently dirty companies, as that “doesn’t get us on our pathway to net zero”. We also need to see an increase in transition finance projects that help deliver long-term emissions reductions.
Turning to the recent collapse of Silicon Valley Bank (SVB) in USA, Breeden stressed that the UK banking system is safe in terms of levels of capital, levels of liquidity and how institutions are managing their risks.
She said the effects of social media speculation, which played a big part in the collapse of SVB, is “something we have been thinking of in the context of bringing in a digital currency”.
The embrace of digital currency, which Breeden acknowledges, can “reduce costs, improve efficiency and support innovation”, reflects her mandate to protect the financial system while enhancing its capabilities – to the benefit of the corporates that use it”.
“Competitiveness comes from the UK being a safe place to do business. It mustn’t be a race to the bottom – that is not how we deliver sustainable competitiveness,” she added.
Lawrie Holmes is a business and finance journalist
Next year's Annual Conference will be held in Liverpool on 21-22 May 2024.