BoE FPC: risk that linked vulnerabilities crystallise together has risen
Victoria Shinder2 min readThe Bank of England's Financial Policy Committee said in the record of its 25 September meeting, published on 30 September, that the likelihood of interconnected vulnerabilities in the financial system crystallising has risen since its previous meeting in July.
The trigger is the re-escalation of the conflict in the Middle East. Higher oil, gas and refined-product prices are turning into a more protracted negative supply shock, renewing uncertainty over growth and the path of interest rates in several advanced economies. Sovereign bond yields have risen to levels not seen since 2008. The committee's concern is that vulnerabilities in sovereign debt markets, risky asset valuations and risky credit could crystallise at the same time.
So far the system has been resilient, and market adjustments have been mostly gradual. But hedge fund leverage in the gilt market, while stable, remains elevated, and the FPC says deeper links between vulnerabilities mean the risk of a sharp adjustment persists, which underlines the Bank's work on gilt repo market resilience. Equity markets have held up in aggregate, though AI company valuations fell sharply in July, amplified by the unwinding of stretched positions, with significant losses for some leveraged investors but no spillover to core markets. The record notes the rapid increase in AI-related debt issuance widens capital markets' exposure to AI, and that recent incidents in frontier AI have drawn attention to cyber and operational risks.
The committee's reassurance: UK households and businesses are resilient, and the banking system is strong enough to support them in a stress.
Why it matters
The FPC's worry is not any single market but correlation: rising yields, rich valuations and credit risk hitting at once. For sterling assets, the gilt repo point is the one to watch, since leveraged positions in government bonds are where a sharp move in yields turns into forced selling.