Bank of England plays down risk to lenders after Carillion collapse
Exposure data for banks and insurers has been analysed, the Bank’s deputy governor said.
The Bank of England has said UK lenders are not under direct threat following the collapse of Carillion this week, but cautioned that the ripple effects are yet to be fully felt.
Treasury Select Committee chair and Conservative MP Nicky Morgan questioned a panel of Bank representatives about the impact on financial services, following reports that some lenders could face hefty losses due to billions of pounds worth of exposure on its loans and debt.
The Bank’s deputy governor for prudential regulation and head of the Prudential Regulation Authority, Sam Woods, assured that he had checked the exposure data for banks and insurers but found little reason to be concerned.
“Those direct exposures are entirely manageable across all the institutions,” he told MPs on Tuesday.
However, the secondary effects are not as easily measured.
“There’s then the question of will there be a wider, indirect issue with suppliers and that’s more difficult for us to get a handle on,” Mr Woods said, but added: “I’m not massively worried about it.”
It comes amid reports that Carillion’s lenders, including Barclays, HSBC, Royal Bank of Scotland (RBS), Lloyds and Santander UK, are facing heavy losses on their £2 billion exposure to the collapsed outsourcer.
There are also issues surrounding the hole left by Carillion on the services front, with the collapsed company having been contracted to manage a number of company buildings and facilities, including their security.
“We’ve been asking institutions, ‘quite aside from your financial exposures, are you going to be able to open your doors on Monday?’, which is sort of the financial services version of the problem that the Government’s been having to deal with,” he said.
“So far it’s been OK, there have been a few issues but nothing too serious.”
MPs also grilled Mr Woods over how authorities plan to regulate European banks after Brexit if negotiators fail to strike a deal.
“If we get no cooperation at all – which is not my expectation but if that is the case – then ultimately we’re not in the business of allowing branches, and firms would have to subsidiarise”, he said.
It would mean clawing back an offer put forward by the Bank in December, which assured that European financial services would be able to continue under current regulations without being forced to convert their branches in the UK to subsidiaries – a move that would otherwise create additional financial burdens for those institutions.
Subsidiaries stand as separate legal entities and are required to hold large capital reserves in case of a market crash, which is meant to stop them from pulling out in such an event and taking customers’ funds with them.
But the central bank said it made the December decision on the assumption that a “high degree of supervisory co-operation with the EU” would continue after Britain leaves the bloc.
Without a deal, that decision will be revised.
MPs later turned attention as to whether UK lenders are aware of the risks linked to rising consumer debt levels.
Mr Woods said his team have been working with lenders to help them “appreciate” those risks “more fully”, but said there are concerns that banking executives are not receiving sufficient data.
“We are a bit concerned that the information coming up to the boards at the relevant institutions isn’t sufficiently granular or clear to allow the boards to have a really good sight of what is going on in the changes to risk appetite.”
Mr Woods added that the Bank will be writing to banks as early as Wednesday to “highlight that point to them.”