1 December 2015 – According to a bank of England survey (the ‘Systemic Risk Survey’) published today, geopolitics (Syria and Middle East), Cyber terrorism and Euro Zone (Sovereign risks) pose more threat to the UK financial system than uncertainties arising in the UK (‘Brexit’ or general elections).
The seven risks most frequently cited in the 2015 H2 survey were (Chart 5):
• Risk of an economic downturn (cited by 72% of respondents)
• Geopolitical risk (46%)
• Cyber attack (46%)
• Risk of financial market disruption/dislocation (44%)
• Sovereign risk (35%)
• UK political risk (26%)
• Risk of property price falls (26%)
This list of risks is similar to that from the previous survey.
The sole change to the composition of the top seven risks was the entrance of risk of property price falls, which displaced risk surrounding the low interest rate environment. But there were some notable changes in the per cent of respondents mentioning certain risks. There were notable increases in the proportion of respondents citing risk of an economic downturn (56% to 72%) and cyber attack (30% to 46%). Regarding the former, about one third of respondents specifically cited concerns about China and EMEs, and about one quarter mentioned the risk of a UK downturn. The high proportion of respondents citing cyber attack continues an upwards trend since 2013 H2.
The perception of sovereign risk and UK political risk both fell materially relative to the 2015 H1 survey (58% to 35% and 40% to 26% respectively). Almost all respondents that mentioned concern about sovereign default in a specific geographic area referred to the euro area. UK political risk was perhaps unsurprisingly lower given the 2015 UK General Election is now in the past. Almost three quarters of those who cited UK political risk mentioned the possibility of the United Kingdom leaving the EU.
Perceptions of geopolitical risk were broadly similar to the 2015 H1 survey (41% to 46%). Of those respondents who gave additional detail on the threat they were concerned about roughly equal numbers mentioned Russia and the Middle East or ISIS.
The proportion of respondents citing the risk of financial market disruption or dislocation increased by two percentage points (42% to 44%). About half of these responses referred to market liquidity issues. The perception of the risk of property price falls increased marginally (23% to 26%).
Risk of an economic downturn was the risk most frequently cited as the number one risk (Chart 6):
• Risk of an economic downturn (43% of respondents viewed it as their number one risk)
• Risk of financial market disruption/dislocation (13%)
• Cyber attack (7%)
• Risk of financial institution failure/distress (4%)
• Other (4%)
• UK political risk (4%)
• Risk surrounding the low interest rate environment (4%)
Risks most challenging to manage as a firm Respondents were asked to indicate which three of the five risks they identified would be the most challenging to manage if they were to materialise. The top seven responses to this question were the same as those illustrated in Chart 5, but ordered differently (Chart 7):
• Risk of an economic downturn (34% of respondents)
• Risk of financial market disruption (31%)
• Cyber attack (29%)
• Geopolitical risk (20%)
• Sovereign risk (17%)
• Risk of property price falls (15%)
• UK political risks (14%)
Risk of an economic downturn is seen to be the most challenging risk for firms to manage. There was a noticeable fall in the proportion of respondents who mentioned sovereign risk. This may be because other risks have become relatively more challenging to manage, the nature of the risk has changed or that firms have taken measures to improve resilience to this risk since the 2015 H1 survey was conducted.
(Source: Bank of England)