Bank of England governor on UK's financial stability

Right. Morning everyone. Thank you for being here. Welcome to the Financial Stability Report press conference. With us today are Sarah Breeden, deputy governor for financial stability, Sam Woods, deputy governor for credential regulation, and the governor, Andrew Bailey. Andrew will begin with opening remarks and then we'll turn to questions. Andrew.

Right. Thank you, Casey. I should begin by also apologizing for the state of my voice which probably will hold up but we'll see. Um but welcome to the um press conference for the December uh financial stability report. So I'm going to highlight uh key themes from today's publications by the FPC. I'm going to start with the uh view we take on the overall risk environment before turning to the work on supporting a sustainable economic growth. then the results of the bank capital stress test and then our updated assessment on the appropriate benchmark for capital requirements for the UK banking system. So there's quite a bit in fact actually it's quite a whopper. Um there we are. Um a lot of work's gone into it.

So the first theme is to highlight that the FPC judges that whilst uh UK household and corporate indebtedness remains low in aggregate overall risks to the financial to financial stability have increased during this year. Key sources of risk include geopolitical tensions, fragmentation of trade and financial markets and pressures on sovereign debt markets uh which could stand to amplify the impact of these risks crystallizing. And as governments around the world face increasing spending pressures, their capacity to respond to shocks in the future may be more constrained than we have seen in the past. And elevated geopolitical tensions increase the likelihood of cyber attacks and other operational disruptions.

Now against this background of heightened risk in the judgment of the FPC, many risky asset valuations remain materially stretched, particularly for technology companies focused on artificial intelligence. On some measures, equity valuations in the US are approaching levels not seen since the dotcom bubble and in the EU and UK not seen since the global financial crisis. The AI sector is a particular hot spot and somewhere where the role of debt financing is increasing quickly as firms seek large-scale in infrastructure investment. So given deeper links between AI and credit markets and increasing interconnections between firms, a sharp asset price correction could lead to losses on lending which could disrupt financial stability.

While credit spreads remain compressed by historical standards, the FPC continues to monitor the structural weaknesses previously identified in risky credit markets, including private markets. Features such as opacity, high leverage, complex interactions, and weak underwriting standards, and a high degree of reliance on credit rating agencies illustrate how corporate defaults could impact bank resilience and credit markets simultaneously. And two recent high-profile defaults in the US have intensified the focus on these issues. Private markets have grown significantly both in size and importance in the UK over the past two decades and are now a significant source of funding for corporates. In this context, the FBC will be launching a second systemwide exploratory scenario or SWES as we like to call it focused on risks from private markets. And we'll be publishing more details on this later this week. It's important for firms to manage their risks by including scenarios in their analysis where losses are greater or more correlated than in the past. And exercises like the sweats help firms to do this more effectively by shining a light on systemwide behaviors.

The second key theme to cover is the FPC's commitment to supporting sustainable economic growth. The single most important thing we as the FBC can do to support economic growth is to maintain financial stability. Financial stability contributes to a stable and predictable economic environment underpinned by a financial system which can absorb rather than amplify shocks. That in turn supports business and consumer confidence and facilitates investment which is needed to drive long-term productivity growth. And in the context of the global risk environment that I've just described, maintaining a focus on financial stability is more important than ever.

So in response to the chancellor's request in the November 2024 agreement letter, that's a year ago, the FBC has considered areas where the financial sector could contribute more to sustainable growth, such as the provision of financing for investment without undermining financial stability. As we've set out in the financial stability report, lending to UK households and corporates has fluctuated in the past as changes in financial and macroeconomic conditions led to rapid growth in lending during boom times and rapid deleveraging during downturns. However, the actions we and overseas policy makers have taken since the global financial crisis to increase bank resilience have enabled the banking sector to continue to support the real economy through recent shocks such as the COVID pandemic. Box A of the FSR sets out the conclusions of the FBC's work to assess and identify areas where there is potential for the financial sector to contribute more to sustainable growth and potential solutions to impediments the sector might face in doing so. These include barriers faced by pension funds and insurers in supporting long-term capital investment in the UK economy, challenges high growth firms face in accessing domestic finance, particularly through the scaleup phase, and issues relating to the responsible adoption of innovative technology. The FBC supports efforts by the bank, the P and other UK authorities to address these challenges and issues.

Third, turning to the theme of bank resilience. Overall, the FBC judges that the UK banking system remains well capitalized. Again, something that we saw reflected in their resilience to recent shocks. Major UK banks continue to report robust earnings and their average price to tangible book ratios have increased further since the July FSR to around 1.4 for today which is consistent with them now earning their cost of capital. That resilience is confirmed by the results of the bank capital stress test which we have also published today. These results indicate that the UK banking system would be able to continue to support the economy even if economic conditions turned out materially worse than expected enabling it to contribute to long-term sustainable economic growth. The bank capital stress test scenario includes a severe global aggregate supply shock leading to a deep recession across countries and a rise in inflation across advanced economies with central banks raising interest rates to bring inflation back to target. In the stress test, the aggregate common equity tier 1 CT1 capital ratio starts at 14.5% and falls to a low point of 11% in the first year. That's well above the sum of aggregate regulatory minima and systemic buffers. No individual bank was required to strengthen its capital position as a result of the test.

As we announced in July today, we've also set out a refreshed assessment of the overall level of capital requirements for the banking system. The FBC judges that the appropriate benchmark for tier one capital requirements has now reduced to around 13% of RWA, lower than its previous benchmark of around 14%. That judgment is consistent with the evolution in the financial system, including a reduction in the systemic importance of some banks and improvements in risk measurement. In addition, the FBC has also considered how the capital framework can be made more effective, efficient, and proportionate. The committee has set out areas for further work, namely enhancing the usability of regulatory buffers, reviewing the implementation of the leverage ratio in the UK, and responding to feedback on interactions, proportionality, and complexity in the capital frameworks. I want to be very clear that these changes apply to all UK banks and building societies. They are not targeted at any specific part of the banking sector. The FPC has decided to maintain the UK cap cyclical capital buffer rate at 2% its neutral setting. This reflects our assessment of the evolution of domestic economic and financial conditions.

So let me conclude. Risks to financial stability have increased during this year. Although in the UK context, aggregate household and corporate indebtedness remains low and the UK banking system remains well capitalized as demonstrated by the stress test results published today. Since the FBC first set out a benchmark for capital requirements, the system has evolved and we're now able to confirm that the benchmark has reduced from around 14% of risk weighted assets to around 13%. The FBC recognizes the important role that the financial sector has to play in contributing to economic growth, but I would underline that the single most important thing we can do to support sustainable economic growth is to maintain financial stability.

Now, before we take questions, I just one other point. This is actually Sam's last um uh FPC press conference. Uh he will not be here in July when we do the next one, although you'll only just have gone. So, it seems only right that he'll answer all the questions today. [laughter] Thank you very much.

Great. Who'd like to go first? Go ahead, Ben and then Harrison. Uh thank you very much. Um Governor, I had uh two and a half or three questions depending on how you measure. Um we've had the loosening of tier one capital rules today and a pledge to look at other measures to relax the capital regime. How far is this sewing the seeds for the next financial crisis? And are you approaching the limits of how far you'd like to deregulate? And secondly, a related question, how can you ensure that banks will not use the looser capital rules simply to return more capital to shareholders rather than boosting lending into the economy? Is there anything you can do to enforce that? Thank you.

Well, first of all, I mean, it's important to say that obviously the the assessment that we've done is in the light of both the evolution of the banking system and obviously the economic conditions that we we've seen. So the stress test plays an important part in that and it is true that this is actually the first cut we've made uh in the uh overall the the sort of what the FBC does which is the sort of the aggregate view of the capital requirements that we should have but that seems to us to be a sensible reflection of conditions sensible reflection of the health of the banking system so I don't have any concerns about this in terms of you know where it takes the regulatory system too. I think it's a sensible thing to do. Now, you posed the second question which is um what obviously follows from this in terms of of of what the benefits are of it? Now, obviously, it's not for us to dictate to banks how they run their businesses. That that must be very clear. But I would emphasize that there is a two-way relationship here that if the banks uh support the economy and support the economy by lending that will strengthen the economy and the banking the banks will benefit from that in terms of their own performance and their own returns and I would expect that they will have that very much in mind uh when they think about the consequences of this. What you want to

Perhaps I might add one thing. The review that we have done has looked at this uh issue of the appropriate level of capital top down and bottom up. And our top-down assessment is based on a review of all of the studies that we uh have been done on the costs and the benefits of of capital regulation. Inevitably that doesn't come up with a single number. It comes up with a range and the number that we've chosen is towards the bottom of that range. We're comfortable with that. As the governor said, it reflects the evolution of the risks that we've seen in the system and the evolution of uh the shape of uh of the system. But it does underline for me how absent any material improvements in how we're measuring risk or the risk that the system is facing, it would be unwise to reduce our benchmark further behind you.

Uh thank you. Um the head of the Bank for International Settlements, um Anand Anders Dos, has called for an end to zero haircuts to stop hedge funds leveraging up on sovereign debt without cost. Um what's the bank's take on this view and to what degree do you think the UK could act unilaterally to impose minimum uh minimum haircuts? Thanks.

Uh I'm happy to take that. Look um the the resilience of the guilt repo market is fundamental to the resilience of the sovereign bond market which is the basis on which uh all financial market activity in the UK takes place. So it's a natural area of focus for us. It was where we did our first systemwide exploratory scenario exercise uh last year. And one of the things that we highlighted in that uh uh as a result of that review was how the resilience of guilt repo financing was something that needed to improve. As you say there's zero haircuts, there's very short maturity uh uh financing as as well. What we're doing on the back of that is twofold. Firstly, uh we are telling the story of what's happening in guilt repo financing in the FSR and in asking firms to ensure that they're stress testing for that. And then secondly, we uh published a discussion paper in the summer that set out how we could improve the resilience of the guilt repo market. That had two uh particular areas of focus in. One was should we introduce minimum haircuts much as uh uh um the general manager of the BIS uh has mentioned and secondly whether we should introduce central clearing for uh guilt repo. Uh we've been engaging with the industry on that topic. Uh we have their feedback in we'll be looking to respond to that uh soon. One thing I would add is that I think if as Sarah says rightly, if very short funding arrangements are being used which can generate zero haircuts, then you have to also look at what the strategies are that those things are funding. Because if they're funding strategies that actually have an assumption that the rollover will happen, then you have to you have to be careful to look through that uh that very short-term funding to assess what's the risk if the funding doesn't actually roll over uh as well as as well as just the term of the funding.

Kina and then Laura >> in the middle. Hi, Kina McCord from the Guardian. Um, going back to capital requirements, um, uh, Governor, what do you say to allegations that you've merely done what Rachel Reeves has pushed for, including in the chancellor's latest remitt letter? Is that compromising your independence? Um, and secondly, will will you reserve the right to reverse this capital cut before it comes into force in 2027 if there is a significant downturn and if financial stability is put at risk in the interim? Thanks.

Well, it's perfectly reasonable for for for the Treasury and for the Chancellor when they are giving us the remmit letter to set out. In fact, I encourage them to set out their thinking. I'd rather know it than not know it. Um, it it's also obviously therefore then incumbent on us to do the work to assess it. Uh, which we've done. Um, and as you see I said in my opening remarks and I'll say again you know absolutely at the core of what we stand for is that financial stability is an is an absolutely yeah precondition of growth in this economy but we do think that these changes as Sarah was saying earlier and I was saying we think these changes are consistent with that and therefore it is sensible to do this um you know we we don't maintain higher levels of capital than we need to in terms of our requirements because that would not be efficient in the system. On the question about what happens next, I mean what one of the things that of course one of the important parts there is that we will continue to do stress tests. So you we're now committed to doing a stress test every two years for the banks. We're also as we've said you know going to do a systemwide exploratory scenario focusing. So I think the answer to the second part of your question is that we will be you know we will obviously be heavily influenced by what happens but also you know the results of those stress tests in terms of what they show. If if I might add one thing, we've put out in the set of documents today all of our thinking that top-down thinking about how we're thinking about the macroeconomic costs and benefits of capital, the bottom up thinking about how the shape of the system has changed, the international comparisons and we're asking for feedback on it. It's not formal rules on which we're consulting but we've shared our thinking so that industry academics think tanks investors can come back with their thoughts on where they think our analysis uh has come out.

I mean it might Sarah says the FBC does the sort of the top down the P and the PLC does the bottom up. Sammy, you might want to say something about how these two match up in that.

Yes, maybe. And I think they do match up well. Um Kalina look there there are um uh strong [snorts] technical reasons to move the benchmark from 14 to 13. Those are to do with the change in the requirements we have around systemic risk which have just come out a bit lower than we have projected 10 years ago. I think it's not surprising there's some movement in those things and then also our how well we think we're measuring risk in the system. We know that that will improve when we implement Basel 3.1 on the 1 of January 27. So th those are good reasons to match up the the bottom up with the top down. I think the other point I'd made would be just to go back to something Sarah said at the beginning which I think is very important which is we we have published a a chart in the report which shows you a kind of a curve and it shows um the effect on long run economic growth of having capital set at different levels and what it does show is that you know we're moving within the range uh which effectively maximizes economic growth um and I think there are good reasons for doing that uh to move very much lower than where we've moved to would or could be associated with a quite significant risk of a negative uh impact on economic growth in the long run and I think if if we moved into that zone your your question would have more force

Laura and then John Paul >> right in the middle >> hi thanks Laura Nina and Bloomberg news uh two questions uh the first one probably is more for Sam and this is if we're thinking about the mechanics of how the reduc of how the reduction in the benchmark capital works from a pillar 2A perspective Should we be thinking that the banks have the highest pillar 2A requirements are going to benefit the most from this? And overall, when you think about the 1% reduction from 14 to 13%. Do you have a range of like there'll be some benefits, some banks that will get at a like 2% reduction, some banks will have have more like a 0.5 or is there a range like that that you could share? And then the other question is totally different. So maybe we'll do this one first and then the next one.

Sorry, what's the last part of your question?

Oh, sorry. So basically, do you have a range? I haven't seen it in the report. Is there a range like say banks will b individual banks will benefit from between say 4% to 0.5% or anything like that you could share with us?

Yeah. Um great maybe I'll take the one then that's okay. So uh look maybe the first thing to register is that the the systemwide capital requirement today um which includes most of the stack there's a couple of bits outside but which are quite small is around 13 and a half% of tier one. So the the change in the systemic capital requirements is already in the system and that will obviously affect firms depending on how systemic they are. Uh the other piece as you say is what we call pillar 2A which is around corrections we make to uh to risk measurement in pillar one. That would be about another half a point. The process through which those um changes will occur is a resetting of those capital requirements for all firms and that's currently in train will be enforced starting from the beginning of 27. So we haven't got a range for you at the moment. Uh overall it's about half a point of capital. But I would dissuade you from thinking that mechanically firms with a higher pillar 2a would get a bigger reduction because actually what drives the size of the reduction is how big the overlap is between what we've got in pillar 2A and what we've now put into Basel 3.1 and that won't necessarily go with size.

Got it. And then the other broader question um around we've seen a number of warnings around hedge fund and the guilt markets and this has been escalating. We have the basis trade in the US basis trade here. Is there anything the bank of England can do beyond warning?

Well, that was a I mean that was the area of our first sweats, the first exercise and the discussion paper that we've issued on guilt repo clearing is is one of the outcomes of that because obviously you can you can do a number of things. You can obviously you could obviously respond to things you identify in those sorts of exercises by changing regulatory rules but you could also and this is the case you know float suggestions of of strengthening infrastructure which is what this is uh so that's that's that's the focus at the moment but I mean the second thing I would say is and by the way of course the guilt market is not that unusual in fact it's not unusual at all amongst government bond markets in seeing this big change in the structure of activity and trading activity and position taking in these markets Um and it's very clear that you know we monitor these things very closely.

John Paul gentleman right in the middle. Um Governor um yesterday um a report into last week's OB leak said that um leaks both intentional and inadvertent in the runup to the budget were to be uh deplored. Do you uh share that view? And were you alarmed by both the OBR leak and the uh apparent briefing from the Treasury, the heavy briefing from the Treasury in the run-up to the budget which apparently caused movements um in in the markets? Should there be a regul regulatory inquiry into uh these matters? Um and has the the Bank of England um itself taken steps to ensure that its own um market sensitive documents are also not subject to these kind of inadvertent errors.

Well, I'm not going to comment on uh on those events because we're not involved. Um, it doesn't concern obviously the activities of the Bank of England, so it's not for me to comment on those. Um, obviously the uh importance of market uh market sensitive information and protecting market sensitive information is very important. Um, you know that's why you had the joy this morning of us locking you in a in a windowless room as a very early hour of the morning. Um, but it is important. Um, now on I can say say to you though on the last part of your question obviously yes we looked very carefully yesterday at the report because we all look at those reports and say what can we learn from them. Um, I can tell you that we use different procedures uh for uh you know our own practices in terms of releasing information as we as we obviously have today. Um, when we do we do obviously for the monetary policy committee as well but you know obviously we you know we we always seek to learn from from these these uh events and we are looking at it very carefully to see whether there's anything in there that uh you know we should uh we should be aware of and take note of and act upon if necessary.

Martin and then Phoebe. Uh >> I have two questions if I may. Um the first one is a timing question really. You've identified today that risks to financial stability are increasing and they're very high and yet at the same time you're going you said you're going to reduce capital requirements on the banks. Aren't you reducing restrictions on the banks at the worst possible time? And the second point is one about in the me in the in the round many of the reforms that were put in place post financial crisis to to respond to that ring fencing the senior managers regime restrictions on bonuses higher capital levels all seem to be being chipped away at or eroded to a certain extent. Did you go too far after the financial crisis? Thank you.

So on the first part of your question, Martin, I mean I think this question about timing is important because you know we've obviously released a stress test today. Um, you know the stress test is again a very thorough I think assessment of the resilience of the UK banking system and and you know the UK's banking system has once again actually I you know I think the conclusion is it is resilient. Second point I'll make is come back to a point I made in my opening remarks that obviously we've been through some very very very substantial economic shocks in recent years and the banking system has come through those uh robustly that's good that's what we want it and need it to do but we haven't had the experiences that we've had in previous cycles and previous shocks and so I think it is perfectly sensible and respons responsible to reach the conclusions that we have done today on on capital um in the light of that. I mean there's an exhaustive amount of analysis gone into this but it is important that we do this and you know looking at the whole cycle I I don't therefore sort of particularly take uh you know any message out of the current situation that we're in. This is a this is a sort of across the whole cycle uh type of conclusion that we're drawing. So uh you know I'm I'm I'm clear that we we can be very robust on uh on that. On your second point about chipping away as you put it and does this suggest that we you know we did too much after the financial crisis I I mean let me give you what I hope is a reasonably balanced answer to this question first of all you know I once again stress obviously you we are charged with the job of maintaining financial stability and we will do that and are doing that and will continue to do that um and you will continue to hear that message from us I always say though does that mean that every piece that the regulatory system is perfectly formed at all times. No, it doesn't. Um, it doesn't. The world moves on, things change. Uh, we learn from experience and and act accordingly. So, that's a you important important message there. Does it mean that we overdid it uh in the post crisis mode? Well, no. So I think you we were having to respond to a you know deep and you know frankly very very difficult and traumatic crisis. I think each of the measures that was adopted was sensible but come back to the point of course we learn from experience uh and we are learning from experience uh and that's what that's why we feel comfortable making these changes uh in in the light of the experience we've had. But I you know I've said many other times in another context um you know we we can't make policy with the benefit of hindsight. We have to make it at the time we made we made all these changes in the light of what we experienced in the financial crisis. I think it was sensible to do those things. Uh, it's also sensible to take account of the the experiences we've had since the financial crisis. But I'll finish by saying this and I've said it many times. What we have to be very alert to you know we're now you know what 17 years on from the financial crisis. We have to be however very very clear and I think it's our job to remind fully that you know the financial crisis is disappearing into the rearview mirror. Memories of it are fading. There's the people around now who were not around when it when it happened but we do have to continue to maintain the lessons of the financial crisis because sometimes people say to me well that's all over. You've dealt with that and I say well we've dealt with it in the immediate sense but actually the lessons of it persist.

Andrew, can I just add one? Yeah, small point of that. Okay, just on the Martin, I'm glad you asked the question in the round because we also tried to look at this in the round and one narrow but important point to bring out which we've put in the report today is is just a reminder actually but we've stuck with it that we reduced our benchmark versus what it otherwise would have been by 5 percentage points giving credit for resolvability, ring fencing, robust supervision and active use of the counteryclical buffer. So that's quite a big delta and quite a big judgment we've made there. and we've stuck with it, but we did also want to remind readers of the report that absent those things um the benchmark will be higher.

Phoebe who's right behind you and then David >> Aron also from Telegraph um governor as the head of Britain's Independent Central Bank up a little bit. >> Yeah, sure. Is this better? >> That's good. >> Lovely. Thank you. Um, as the head of Britain's uh independent central bank, have tensions between the OPR and the Treasury over its forecast undermined fate in economic policym and should the Treasury come clean on its correspondence with the OBR? And I was also just hoping to ask you, are attacks on independent institutions like the OBR dangerous?

Well, again, it's not for us at the Bank of England to comment on the position of the OBR uh and and and the position of the Treasury in respect to the OBR. Uh I don't think that's appropriate at all, frankly.

You commented on attacks on the Fed before.

Do you want do you want to use the microphone? Sorry, just Yeah.

Uh sorry, you sort of commented on attacks on the Fed before, sort of political attacks. So just thinking about sort of political attacks on the OBR now do you have any comment on whether that's dangerous whether it sets sort of a dangerous precedent?

Well, I've said that in the past because I think what is what is important and the reason the OBR was created uh was to ensure that there is a source of uh independent forecasting and independent assessment of of fiscal policy and that's important. I mean it's important in many countries. I mean Britain's not unique and there's nothing unusual about Britain. All the arrangements differ slightly but there's nothing unusual about this absolutely sort of core principle. um, you know you'll remember it was done um, it was done actually by George Osborne when he was was chancellor and I think it was it was a sensible thing to do uh and remains a sensible thing to do because that's an important foundation of of the arrangement. So, you know attacks on the OPR is in terms of the principle I would say no can we please remember why it was done and the principles underlying it but it's not for us to get involved in the sort of the day-to-day uh affairs of that.

David Milikin and then Joel >> thank you David Milikin from Reuters. Um, sort of uh two questions. Um first just on the sort of guilt repo sort of issues. Some of the numbers involved here are sort of pretty huge. You had sort of in the financial stability report I think 100 billion pounds sort of bet sort of in November. Can you just spell out a bit more sort of what happens if something sort of goes wrong here whether it is something where sort of the state the taxpayer might need to step in to bail out sort of banks or hedge funds and sort of or whether it means sort of the government sort of can't raise money easily from debt markets. And um second um just this issue of sort of dollar liquidity and banks reliance on sort of dollar funding sort of how much of a concern sort of is that to you? Are you sort of concerned that potentially there could end up being sort of shortages here because of sort of volatility in sort of say US financial markets and again what should be being done about that?

Well, I'm Sarah Sarah I'm sure want to come in. I I I'll start off. Um look we we obviously look very carefully at at these questions about the impact of leverage in uh you know in in the non-bank world and including in in the guilt market in government bond markets. It's a it's a major focus both domestically and internationally. So it obviously features you know two two things we can draw on it. As I said, we did the systemwide exploratory scenario which was explicitly designed to sort of do a systemwide test of that and and obviously do a systemwide test when you put a shock into the system and say what happens when it unwinds you quite suddenly and quite violently. And obviously the second thing I would say is that you know a lot of our focus is on the linkages between the core of the financial systems in this case the banking system really and these other parts of the system as they've grown. So again, the bank stress test is important there because again we're testing you shocks that we put into that system in terms of how they can affect and transmit back into the core. So both of those exercises you really really seek to get to the same thing. And you know I'm afraid I have no question that we will have to go on doing this. Now we had some experience earlier this year. I would say if you go back to the spring, we saw obviously some you know very sharp movements in in markets around the time of some of the tariff announcements that gave us something of a line of sight but it actually you know it triggered some parts of that sort of ecosystem and not others. So we have to go on testing it on dollar funding. I would simply say this. I mean we obviously let's go back to the global financial crisis for a moment. We had some very very you know difficult experiences during that period about you know banks maintaining very large what I would call dollar funding gaps. Um and obviously it's critical because we're the UK central bank. We can obviously control the supply of sterling into the system and we can solve issues but we're not obviously in in control in the same way of the supply of other currencies or other count's currencies including obviously the dollar. So we do I mean I think both from a macro and a micro potential point of view obviously have to watch that very carefully. Now I would say this that I think that you know we're not in a situation of the sort that we were in during the financial crisis. The supervision of that side of things is much tighter. But we do spend a lot of time in the bank of England looking particularly in the context of the dollar because it's the reserve currency at what would be the you know what would be the context or stress in those markets and how they how would they feed through into our system and what access might we need to dollars uh as a system that is to to counter that. So it is very much a focus of our of our activity. If I might add on uh the hedge fund repo uh positioning, what we learned from the SW that what causes a reduction in financing to hedge funds is a concern about their credit quality uh andor a a nervousness from banks about putting their balance sheets to work in a period of stress. And so what we are doing here is being really clear about what might happen to the market and also ensuring that the banks have the resilience to be able to support the market through providing funding to uh their guilt repo uh counterparties through it. And that's what we can do beyond warning in the short term.

Joel right over there. And then Thomas, >> uh Joel Hills, ITV News. Um Governor, through the prism of financial stability, there were big swings in guilt yields uh ahead of the budget. Uh to what extent do you think that markets were reacting uh to the pre-budget speculation, which in some instances turned out not to be correct? And Andy Heldane, formerly of this parish, described the buildup to the budget as a circus. He said, "One of the reasons we had very weak growth in September was because there's that budget speculation. It's dampened people's willingness to spend. And first and foremost, we need to stop that speculation. Is he right?"

Well, look, let's Joel, let's let's sort of take the question apart if you don't mind a bit. Obviously, look, the statement is the obvious that the budget is a, you know, market sensitive event. So, it's not surprising that markets move uh uh in response to news in the budget. Um, I think the question that you were posing in the quote from Andy Haldane is a rather different point which is was there in the e economywide were businesses for instance cautious more generally until they saw what was in in the budget and I think there was a lot of anticip there was a lot of expectation building up obviously about what would be in the budget. That's not a point about you know what was said this day, what was said the next day. This is a point about the general significance of this budget. Uh, which I think was was was very clearly established. So I I would put it into that context. Uh, now obviously business you businesses now know what's in the budget and can go forward on that basis.

And in terms of speculation, market moves in speculation.

Well, I I'm not I'm not going to comment on the budget process. I think that's not for us to comment on. I think that's a matter for for parliament and treasury.

Thomas at the back. >> Hi uh Thomas from central banking. I want to go back to the guilt market. So um a lot of the hedge funds are in the guilt market because they can make a profit by doing these relative value trades. So by introducing minimum haircuts, you're inevitably taking away some of the profits and taking away some of the incentives that have led the hedge funds to the guilt market in the first place. So my question is a if they do leave are you worry about you know are you worried that the hedge funds uh will leave in response to policies from the bank especially given that a lot of the hedge funds are not based in the UK in the first [clears throat and cough] place and B if they do leave are you okay with that?

Well, obviously the reason that we would come out with a conclusion that it was sensible to have haircuts and to have margining would be because of the risks in the system. Um, we wouldn't do it you on a whim obviously it would be because of the risks in the system. So I think if you go down that road you in you know you're putting emphasis rightly I think on the argument that well look if this system is unstable in that sense then we have to be very careful that the the gains and the benefits of it that are being made in the good times are you know are elusory in that sense because they will disappear when things and the system isn't robust and resilient to uh to to the shock that might come along. So that's what we have to do and that's the argument for why we you know if if we go down this road that's why we should do it. It's not based on you know just have it on a whim in that sense.

If I might add it's the exact same question as the level of bank capital. The level of bank capital needs to be set with an eye to the cost of a crisis versus the impact on activity in normal times. That exact same process needs to be thought about in the context of the resilience of the guilt market.

Anna, you um [clears throat] Annaise from uh press association um uh cyber attacks. Um you've raised this as something that's a concern to financial stability. Um and we saw from JLR just how damaging a major attack can be to a company and the wider economy. Um, are you concerned that there are plenty of British businesses that will not be prepared and will be too late to get ready for this risk?

Well, I mean, sadly, um, you know, I've said many times, I'll say it again, you know, if you look at the lead table of risks post the financial crisis and ask the question, you know, what risk has come up the lead table most sharply in that period, I'm afraid cyber would be up there for me, uh, right at the top. Uh, first point. Second point is it never goes away. uh you know we have to be I'm afraid very sort of you know straightforward and sort of you know frank about this um you know you can't mitigate cyber risk in a way that just takes it off the table. Um that's not to say you by the way that's not to say we have to do a lot of things because we do but we just have to be very very cognizant and very you know very realistic about the fact that as we develop defenses and firms develop defenses you know the bad actors out there are developing at the same time. So it never goes away. I I mean I do think that you look at it globally um there is evidence of more impacts uh you know the impacts if anything are building you we you you've pointed to very well-known cases and so our approach is is with the financial sector is to say it's it's critically important we have to go on you know working together on it and we have to go on setting standards because as I'm afraid it will just go on evolving. Um, and look, I there is no push back from the financial sector on this whatsoever in my experience. I mean, we're in this yet we're in this together. In that sense, I think they are just as cognizant as we are of the risks that are around. Um, we've pointed to it uh in the context of this financial stability report again and we've made a particular point here and let's be let's be absolutely frank about this that the fragmentation of the world economy the fact that there are bad actors out there you know in the world economy we know we know who they are um you know there is an association with cyber attacks.

Can I add one thing on that one thing we have tried to emphasize to financial cial services firms is think about how if you are attacked how it affects your customers and the activity that happens in the economy and in the financial system and ensure you are resilient to the most serious threats there.

Hi Ellen from Politico. Um in the financial stability stability report you talk a lot about stretched valuations and equity markets. Obviously in the US you focus on AI companies. What sectors of the UK market are you particularly concerned about?

Well, it good question. So let's start with the US. Uh, it is the case that as we said after report that we've got very stretched valuations and I mentioned this in my opening remarks. Now let me make two other points or three other points sorry one one of course as as lot many people have pointed out this sector is very concentrated so if you look at the sort of the percentage of the S&P that is accounted for by this you know in numerical terms it's of company numbers it's very small um but it's but it's very significant [sighs and gasps] the second thing is that um there is a I mean there is a difference to the dot situation at the moment that these companies have got positive cash flows. I mean they're not um sort of you know created on a sort of you know on hope but as we see and we were seeing it last week I think in the sort of you know debate between sort of you know is is Google you know rate moving on to Nvidia's patch. It doesn't mean to say everybody's going to win. It doesn't mean to say everybody's going to win equally. Uh third point I'd make is that it's important to make to be clear that it is it is quite it is not inconsistent be quite consistent in fact that AI turns out to be the next what I tend to call general purpose technology in terms of prompting productivity growth across economies. I mean I hope it is but we'll see. But it is it now it is quite consistent with that outcome and still having a bubble because the job of markets is to price the future stream of earnings. Those future stream of earnings could be very positive but they can still get it wrong. Uh, they can still be you know be too much on the on the upside. So

We have to be, you know, very cognizant of that on the UK. Um, you know, one of the things that we've highlighted though is that, of course, you, you could, even though the UK doesn't have this concentration and most other markets don't have this concentration, you could get spillover quite easily. Um, you know, we've seen equity markets spill over many times in the past. So you could get something that starts in, in, in, in a particular part of, let's say, the US market that spills over into world markets. So we have to be sensitive to that.

>> Great. Anyone else? Oh, go ahead, Laura. One more. [cough and clears throat]

>> Sorry, just one quick question again back to the capital benchmark. I noticed that you said that it would put the UK in an area similar to where other major jurisdictions either are or are headed. What if other major jurisdictions head someplace different and unexpected? So if there is massive deregulation in the US, for example, between now and 2027, would you still be thinking that where the UK needs to get to is 13% tier one as a kind of baseline, or would you revise?

>> Um, let me say two things on that. Firstly, we've published a lot of material on the, the calculation of the comparisons because it is, you know, to coin the phrase, the devil's in the detail of those things. Um, and, you know, I think we've set out probably the most extensive account of it we've ever set out, uh, because it's important you don't get to those, those outcomes easily. I hear lots of numbers get quoted out there. We tend to sit in this building, think they haven't looked at part of the, you know, because I mean, give the comparison with the US as we sat out. You can only compare US and UK banks in this respect, not just looking at the capital side, by looking at the risk-weighted asset side, because the US has a very different risk weight. It's Collins' floor that we talked about in the report. So that's a point I'd make on the, what happens next in other places. Look, we're, we're in very close touch with them. Um, you know, through the Basel Committee, through the Financial Stability Board, which I have the pleasure of chairing, um, so there are very active, you know, discussions going on. Uh, it will be one of the priorities of the Financial Stability Board in the next year that we, yeah, you, we are focused on these issues, and it is very important, of course, that, you know, everybody now completes adopting Basel 3.1, and I've said this before many times, I'll say it again, it's important not just for credential reasons, but because this is the playing field. This is the, you know, it marks out the field that banks can play on, to use a metaphor, if you like. And if we don't go ahead on that basis, then we've got a much bigger problem. We've got a much bigger problem. Now, all my sense is, talking to international banks from around the world, they all want that to happen because they get this point that it's a playing field. It, you know, it defines the basis of competition. If we see very, very big deregulatory moves, well, I mean, there's going to be some pretty frank conversations going on to start with, and that will be the starting point.

Ben, thank you for the extra question. Um, Governor, do you have a view on, um, whether the budget is particularly pro-growth? Obviously, the health of the economy is central to financial stability. Do you think that the budget measures last week are conducive for growth?

>> Well, I think, look, I think the OBR has set out its view on, on growth, um, and the budget. So I'm not going to add to, to that because we will, of course, in the monetary policy committee context, be putting that through our own, uh, you know, our own assessment, and we will be doing that, and we will publish that. Um, yeah, we, we will publish it most obviously when we get to the February monetary policy report and we're back in this room again talking about that. So that's, um, that's how we will do that. I think it is essential that we, to be honest with you, going to all the questions about processing the budget, let's step back from that. The biggest issue is an issue of substance for policy as a whole. It's why we've been talking about the financial stability report in this context, is that we have policies that support growth. And the reason is this, something I've said, I say often, but I'll say it again. For the last 15, 7, 16 years, we've had a potential growth rate in the economy which is about 1% lower than what it was for the previous 20 years. So it's about, yeah, we went from about two and a half to one and a half. It's about one and a half today. We think, and I think the OBR are in about the same place. Um, now the consequence of that for, for policy, both for policy quite broadly, is is very challenging. And by the way, this is, of course, the case in many other countries. The UK is not alone in this, in this. We've had a fall-off in productivity growth. I, my own view on this is that I think it's got a lot to do with the point we were just discussing on AI. You know, we had a quite a big technology-driven innovation, productivity growth in the preceding 20 years. That contribution to growth has fallen off, as it had in previous times of history. By the way, the question is, where's the next one going to come from? It's probably AI. I think if it comes from anywhere, how quickly is it going to come? But we need, you know, we need an environment and policies where we can support growth because if we don't raise the potential growth rate and therefore the actual growth rate of the economy, the whole policy context is is much more difficult. I mean, as we're seeing that the choices are much more difficult to make. So we have to, all of us have to be absolutely focused on raising the growth rate.

>> Last one, Elliot. Yeah, just following up on my previous question, you warning about these spillers, spillovers into the UK equity market. Um, at the same time, we are seeing kind of both the government and the financial sector try to encourage more retail participation in the stock market. Are you worried that there could be risks that more retail investors get into the stock market and then we see this AI bubble burst?

>> I think, I think we, we need more, uh, investment in the real economy. We do not have a good story to tell about this over many, many years. By the way, this is not a point about any particular government. This is a point about a very long period of time. That's why the pension reforms are so important. Um, that's why having more investment in risk capital is important. Now, of course, it has to be done, you know, eyes wide open, understanding the risk proportionately and all of that, but we do need a system that gets more investment into the real economy because again, going back to what I was just saying about productivity growth and, you know, it depends on investment.

>> I'm going to. Thanks very much, everyone.

>> Thank you. Hold up.