The main reason for this, the bank said in a statement from an internal policy meeting on 23 March is mainly because the financing of the UK current account deficit – which remains high by historical and international standards- is dependent on material inflows of portfolio and foreign direct investment. Further pressure on these flows “have the potential to reinforce existing vulnerabilities for financial stability,” said the FPC.
Those flows have contributed to the financing of the public sector financial deficit and corporate investment, including commercial real estate, noted the policy committee. Increased uncertainty in connection with the EU referendum “could test the capacity of core funding markets at a time when the liquidity of these markets has shown signs of fragility across advanced economies,” it said.
Furthermore, the effect of uncertainty has been most marked in sterling spot and options markets, it said. “Looking ahead, heightened and prolonged uncertainty has the potential to increase the risk premia investors require on a wider range of UK assets, which could lead to a further depreciation of sterling and affect the cost and availability of financing for a broad range of UK borrowers,” explained the document.
And, if the United Kingdom decides to leave the European Union on 23 June it could affect the euro too by driving up risk premia and diminishing the prospects for growth in the European region.
But, concluded the committee, stress tests carried out in 2014 of major UK banks (which incorporated an abrupt change in capital flows, a sharp depreciation of sterling, a marked increase in unemployment and a prolonged recession) showed that domestic banks are resilient, and since then they have become even stronger.
