Measuring Risks to UK Financial Stability

54 Pages Posted: 20 Jul 2018

See all articles by Alexandra Varadi

Alexandra Varadi

Bank of England

Cian O'Neill

Bank of England

Iren Levina

Bank of England

Richard Galletly

Bank of England

Stephen Burgess

Bank of England

Jonathan Bridges

Bank of England

David Aikman

Bank of England - Monetary Assessment and Strategy Division

Date Written: July 20, 2018

Abstract

We present a framework for measuring the evolution of risks to financial stability over the financial cycle, which we apply to the United Kingdom. We identify 29 indicators of financial stability risk, drawing from the literature on early warning indicators of banking crises. We normalise and aggregate these indicators to produce three composite measures, capturing: leverage in the private nonfinancial sector, including the level and growth of household and corporate debt, as well as the United Kingdom’s external debt; asset valuations in residential and commercial property markets, and in government and corporate bond and equity markets; and credit terms facing household and corporate borrowers. We assess these composite measures relative to their historical distributions. And we present preliminary evidence for how they influence downside risks to economic growth and different horizons. The measures provide an intuitive description of the evolution of the financial cycle of the past three decades. And they could lend themselves to simple communication, both with macroprudential policymakers and the wider public.

Keywords: Macroprudential policy, financial crises, financial stability, early warning indicators, countercyclical capital buffers, data visualisation

JEL Classification: E44, G01, G10, G28

Suggested Citation

Varadi, Alexandra and O'Neill, Cian and Levina, Iren and Galletly, Richard and Burgess, Stephen and Bridges, Jonathan and Aikman, David, Measuring Risks to UK Financial Stability (July 20, 2018). Bank of England Working Paper No. 738, Available at SSRN: https://ssrn.com/abstract=3217098 or http://dx.doi.org/10.2139/ssrn.3217098

Alexandra Varadi

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Cian O'Neill

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Iren Levina

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Richard Galletly

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Stephen Burgess

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Jonathan Bridges

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

David Aikman (Contact Author)

Bank of England - Monetary Assessment and Strategy Division ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

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