Senior analysts of the UK banking sector believe the country’s major banks remain highly vulnerable to the current turmoil in the global economy, with several factors affecting stability.
The slowdown in China’s manufacturing sector and subsequent market turmoil, plummeting oil prices, stubbornly low inflation and now the news that Japan’s economy shrank by 1.4% in Q4 of 2016 are all signs that another global crash could potentially be on the way, eight years after the slump of 2008.
Respected financial expert, Sir John Vickers, who leads the Independent Commission on Banking, told the BBC that banks should be holding more capital in order to prepare themselves for any forthcoming fallout in the market.
He said, “A good way to think about it is as an insurance policy. You do have to pay a premium to insure your house and you hope nothing bad will happen. But if it does, you are much better off in paying that premium, and for full coverage. If banks run out of capital, all sorts of havoc could ensue. We want to be in a position where there’s enough of a buffer to take any losses that might occur.”
He had also earlier written an opinion article for the Financial Times newspaper in London, stating: “Given the awfulness of systemic bank failures, ample insurance is needed, and equity is the best form of insurance. The recent volatility in banks underlines the importance of strong capital buffers. The Bank of England should think again.”
Vickers, a former Bank of England chief economist, says UK banking institutions are still at risk despite measures to strengthen finances, having led an inquiry into the safety of UK banks following the 2008 crash. Vickers believes the recommendations he made to the market via the Independent Commission on Banking have been watered down by the Bank of England and that leaves the banks in a position of vulnerability.
The warnings have come as global fears of another crash have been fuelled by China and Japan’s economies continuing to rock, with China’s financial authorities expected to spend billions of dollars to inject some power and growth into the Shanghai stock market.