Top firms braced for ‘high impact’ collapse

NEARLY 90 per cent of financial firms think the chance of a “high-impact” event happening in the next year – such as the collapse of the euro – has increased in the last six months, according to the Bank of England.

The likelihood of such an event – which could also include a credit rating downgrade for the UK or a government debt default – happening in the short term is at the highest level since 2008, a survey conducted by the Bank said.

The gloomy state of the economy was reflected in the Bank of England poll published yesterday as fears grow over the future of the eurozone and amid recent warnings from the bank’s governor, Sir Mervyn King, of a double-dip recession.

Elsewhere, the poll found that 59 per cent of the respondents, which include banks, hedge funds and building societies, are less confident than in the first six months of the year.

The threat of the eurozone debt crisis was the most commonly cited risk, with the economic downturn, funding risks and risks around regulation and taxes also in the top five.

The Bank conducts its “Systemic Risk Survey”, which launched in 2008 in the grips of recession, to monitor financial stability in the UK and to identify risks posed to the sector.

Nearly 70 per cent of participants thought the chance of a high-impact event occurring in the medium term – that is one to three years – had increased.

Some 76 per cent of respondents flagged sovereign debt risk as the biggest threat, while 76 per cent also raised the risk of economic downturn as a serious problem.

A couple of respondents said that a financial transaction tax – or Tobin tax – was a risk to financial stability.

A Tobin, or “Robin Hood” tax, on global financial transactions is one of the points of disagreement among European leaders looking at tackling the financial crisis.

Both Germany and France have indicated that they favour such an approach, arguing that it would raise billions of euros to deal with the sovereign debt crisis in the European Union.

Prime Minister David Cameron, however, has grave reservations, arguing that such a tax would harm the City and drive business to Asia and the United States.

Paul Tucker, deputy governor, financial stability, at the Bank of England, said yesterday: “The information gathered through the Systemic Risk Survey, since its launch in 2008, has proven valuable in identifying risks to the UK financial system.

“It represents another step in providing transparency around the Bank and its financial policy committee, which meets on Wednesday and whose recommendations will be announced on 1 December.

“We hope that today’s inaugural publication of detailed survey results will be of wide interest, shedding greater light on market participants’ current views of confidence and risk.”

The survey, published twice yearly, asks participants in the financial markets about perceived risks to and their confidence in the UK financial system.

The survey published yesterday was conducted by the Bank of England between 20 September and 21 October this year. Sixty-eight financial institutions responded.

Respondents’ confidence in the stability of the UK financial system as a whole over the next three years fell to its lowest level since 2009.

The poll showed that 28 per cent were “not very confident”, while 57 per cent were “fairly confident”.

When asked about the risk regarded as being the most challenging to manage as a firm, 68 per cent cited sovereign risk.

The danger of an economic downturn was quoted by 38 per cent.

Risks around regulation or taxes were quoted by 31 per cent of respondents and the risk of financial institution failure or distress was quoted by 21 per cent.

Thirty-five per cent said a funding risk would be the most challenging to manage as a firm.

The falling confidence, which showed a net balance of 59 per cent of respondents reporting decreased confidence over the past six months, was consistent with a fall in the reported level of confidence in the UK financial system.

Analysis of the data showed that confidence in the UK system was sharply lower in this survey than one earlier this year.

The fall was driven by the fact that 28 per cent of respondents were not very confident this time round.

Fifty-seven per cent were fairly confident and only 15 per cent very confident.

l Fears over the eurozone debt crisis and the collapse of talks aimed at reducing the staggering US budget deficit hit world markets yesterday.

Spain was forced to pay sharply higher interest rates in an auction of short-term debt. The FTSE-100 ended 0.3 per cent lower, while Germany’s Dax lost 1.2 per cent and France’s CAC-40 0.8 per cent.