The Bank of England’s executive director for financial stability, Andrew Haldane, said the biggest global risk is a jump in bond yields that might happen for reasons beyond the unwinding of central-bank policy.
“If I were to single out what for me would be the biggest risk to global financial stability right now, it would be a disorderly reversion in government bond yields globally,” he said in testimony to U.K. lawmakers in London today. “We’ve seen shades of that over the last two to three weeks.”
U.S. Treasuries have had their longest losing streak in four years since May 2 amid bets the Federal Reserve will cut back on monetary stimulus. U.K. government bonds have also weakened, with the yield on the 10-year gilt climbing to 2.16 percent from 1.61 percent.
People have tended to “overfixate” on signs of the end of quantitative easing or forward guidance as the spark for a pickup in yields, Haldane said. Other triggers include the reversal of a “flight to safety” that’s pushed yields down in recent years. The BOE’s Financial Policy Committee must assess the impact and risks, he said.
“We have intentionally blown the biggest government bond bubble in history,” Haldane said. “We’ve been vigilant to the consequences of that bubble deflating more quickly than we might otherwise have wanted. That’s a risk we as FPC need to be very vigilant to.”
Haldane was testifying to Parliament’s Treasury Select Committee on the reappointment of officials to the FPC. The central-bank panel was created as part of the government’s decision to restore banking regulation to the BOE and is charged with monitoring broad risks to the financial system.
Haldane also said the options the committee could propose to boost the capital of Lloyds Banking Group Plc (LLOY) and Royal Bank of Scotland Group Plc (RBS) were restricted because they’re largely government-owned. The Treasury had indicated it wasn’t prepared to inject more state funds into the lenders, he said.
The FPC’s independence from the government “has not been compromised,” Donald Kohn, a member of the panel, told the committee earlier today.
Britain’s lenders have been selling units and detailing plans to bolster their businesses since the central bank initially said in November it was concerned that they weren’t holding enough capital.
Lloyds has sold a 35 percent stake in wealth manager St. James’s Place Plc and is considering a sale of its Scottish Widows Investment Partnership division. Edinburgh-based RBS said in February it would sell a 25 percent stake in Citizens Financial Group Inc., the U.S. consumer and commercial lender, and would further shrink its investment bank.
The decision by Moody’s Investors Service to slash Co-Operative Bank Plc’s credit rating to junk status on May 9 was a “surprise to almost everyone,” Haldane said, adding that “more needs to be done” to stabilize the bank.
The Co-Operative Bank, based in Manchester, northern England, said last month that the six-step downgrade to Ba3/not prime from A3/prime doesn’t mean it needs a government bailout. Moody’s said the bank may require “external support” if real-estate losses escalate.
When asked to list other risks to the financial system, Haldane said regulators and government should “take a close look at the state of preparedness” of major banks to protect against cyber-attacks in which their electronic payment systems may be threatened.
The topic was raised at a meeting of senior risk-management officials at major banks he attended six months ago, he said.
Lawmakers also questioned Haldane on his views on the government’s “Help to Buy” mortgage-guarantee scheme and the risks of creating a bubble in the housing market.
The program “does bear some watching” as the FPC must “be vigilant to any signs of this or anything else causing credit growth or house prices to begin moving away too rapidly in a way that might imperil financial stability,” he said. “We’re not there at the moment.”
The FPC has been charged with assessing when the plan should end after three years, and officials should ensure that it doesn’t remain in place forever, he said.
“Fannie Mae and Freddie Mac were temporary schemes and 75 years later they were still in place and blowing the world up,” Haldane said. “We need to have a safeguard against that, and I’m happy to see the FPC be that safeguard.”
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