After the events of 2008, a multitude of committees was deemed necessary to deal with the challenges of a post crisis world. One of the better ones has been the UK’s Financial Policy Committee, which recently published its latest quarterly report.
Its remit is to contribute to the Bank of England’s objective of maintaining financial stability. Specifically, the committee was tasked with identifying, monitoring and taking action to remove or reduce systemic risks, in order to protect and enhance the resilience of the UK financial system. In other words, its job was to “kick the tyres” of the financial system. Meanwhile, it would keep an eye out for any “bubbles” inflating in asset markets - and where spotted, it would attempt to deflate them. Worthy aims, to be sure. But easier said than done.
So what’s currently exercising the Financial Policy Committee? And do its concerns chime with the worries currently being discussed (and therefore perhaps priced) by investors?
Globally the committee frets about the state of the emerging market economies and the impact of slower emerging market growth on the developed economies. How much impact would any further slowdown in the developing world have broader asset markets? The committee also notes a world where asset prices are underpinned by low interest rates - and are therefore vulnerable to any change in this cheap money environment. At the same time, market liquidity is fragile in places.
Closer to home, it regards the high level of indebtedness in the UK, allied with a high current account deficit, with some dismay.
The committee is also concerned by the buy-to-let market, and some areas of the commercial property market, where it notes a rise in borrowing, and strong inflows to open-ended funds. I fancy the Chancellor had a preview of this report before training his sights on the buy-to-let market in his Autumn Statement, where he surprised many with his 3% stamp duty increase.
A lengthy checklist of worries, then – but not yet a list deemed sufficient for the committee to use its considerable powers to require action in any of these areas.
It may strike one as odd that low interest rates and the various forms of quantitative easing implemented by the Bank of England have largely been designed to encourage investors to move up the risk curve – into precisely the sorts of assets that one of its committees is now worried about.
This aside, this committee looks like it is troubled by the same concerns as the bulk of investors. I suspect that the fact that we are all worried is probably a good thing. After all, there weren’t enough worriers in 2007.