Britain’s financial system is by far the least resilient of all the G7 major economies – and the threats posed by Brexit make it even more exposed to future shocks, according to a new report from the New Economics Foundation.
The report, Still Exposed: The UK’s Financial System in the Era of Brexit, measures G7 countries against a Financial System Resilience index, developed through expert roundtables, interviews and academic literature review. The index looks beyond simply how much capital banks are holding and measures countries against key factors influencing resilience, including diversity, interconnectedness, asset composition and complexity.
The UK scores 34.9 out of a possible 100 for financial system resilience, almost half the score of Italy – the next most resilient financial system in the G7. Germany has the most resilient financial system in the G7, with a score of 78.5.
Since 2015 when the New Economics Foundation last ran the index, the UK’s resilience has improved in some areas. But it still has the largest, most concentrated, complex and interconnected financial system in the G7, and is therefore highly vulnerable to future shocks. And with recent data suggesting levels of household debt will rise above 150 per cent of GDP by 2019, the UK’s relative lack of resilience to future shocks ought to be a major concern.
The report also forecasts the likely effect of different Brexit scenarios (hard Brexit, soft Brexit or a bespoke agreement) on the UK’s financial system. It finds that any outcome other than a ‘soft Brexit’ would pose significant risks to financial stability.