The Bank of England on Wednesday warned that markets are vulnerable to a correction, while a survey by the central bank found geopolitical risks are front-and-centre in the minds of those at the helm of finance firms.

Threadneedle Street on Wednesday published both its latest financial stability report, and its biannual systemic risk survey survey,

The report showed ‘risks to UK financial stability are broadly unchanged since the June 2024’ iteration. However, Threadneedle Street cautioned that ‘significant financial market and global vulnerabilities remain’.

‘There was a significant spike in volatility across global financial markets in August. Although short-lived, the extent of the moves, in response to relatively limited economic news, illustrates the potential for vulnerabilities in market-based finance to amplify shocks. But while there was evidence that investor deleveraging had amplified price moves, it did not spillover or materially affect the functioning of core markets. It might have done so if subsequent economic news had not been positive or deleveraging had been more significant or broad-based,’ the BoE said.

In August, markets were roiled by volatility that rippled out from Japan in the yen carry trade after the Bank of Japan lifted interest rates. The carry trade involves borrowing in a currency with low interest rates to buy currencies that offer with higher interest rates.

When the BoJ hiked interest rates after years of negative yields, some of these positions needed to be reversed.

The Bank of England on Wednesday warned that various asset classes, equities in particular, recovered from the mayhem but returned to ‘stretched levels’. The central bank believes this leaves them vulnerable to more volatility.

‘Markets remain susceptible to a sharp correction, which could affect the cost and availability of credit to UK households and businesses, with investors sensitive to short term developments in a challenging global risk environment. Global vulnerabilities remain material, as does uncertainty around the geopolitical environment and global outlook,’ the BoE said.

It added: ‘There have been further signs of easing in UK credit conditions, reflecting improvements to the macroeconomic outlook. In aggregate, UK household and corporate borrowers remain resilient to the higher interest rate environment although some highly leveraged firms, including smaller and private equity backed businesses, remain under pressure.

‘The UK banking system remains in a strong position to support households and businesses, even if economic and financial conditions were substantially worse than expected.’

The central bank’s latest systemic risk survey found respondents ‘remain confident in the stability of the UK financial system’. The level of confidence spiked from the first-half survey report.

‘The perceived probability of a high-impact event affecting the UK financial system in both the short-term and medium-term has fallen further,’ the BoE said.

However, geopolitical risk and cyber attack ‘remain the most frequently cited risks among participants’.

‘The proportion of those citing geopolitical risk [increased] further to its highest level recorded in the survey,’ the BoE said.

‘Geopolitical risk and cyber attack continue to be considered by a majority of respondents as the most challenging risks to manage, and the most likely to materialise.’

The survey has been undertaken biannually since 2009, following an initial pilot in the summer of 2008, during the global financial crisis. The survey was first published in November 2011 and it is usually completed by executives responsible for ‘risk management or treasury functions’.

This time around, 55 firms participated in the survey, which the BoE said gave a response rate of 68%.

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