Systemic risks to the UK’s economic stability

Since 2009, the Bank of England has surveyed corporate risk and treasury leaders every six months (apart from a brief hiatus during the Covid crisis) about risks that could threaten the nation’s economic stability. How likely is another severely disruptive event in the foreseeable future – and how well equipped is UK plc to manage the impact if the worst should happen?

Respondents to the latest survey are generally confident in the UK’s financial stability over the next three years: 69% are fairly confident, 24% are very confident and 1% have “complete confidence”. Nonetheless, 52% believe that the likelihood of another high-impact event in the UK financial system in the short term is either “high” or “very high”, compared with 31% who reported that level of concern in H1 2022.

Respondents believe that the probability of a high-impact event in the medium term is even higher. Despite their relative confidence in the UK’s financial stability as a whole for the next three years, 67% consider the likelihood of a severely damaging event to be “high” or “very high” over the same period.

Unsurprisingly, geopolitical risk and inflation are among the main concerns cited by most respondents (75% and 53%, respectively), but even more (79%) rank a destabilising cyber attack as one of the five most significant threats to the UK financial system.

Treasury and risk leaders find it difficult to manage a wide range of risks, but inflation, cyber threats and geopolitical uncertainty are causing firms the most anxiety. Significantly more respondents are worrying about the risks of an economic downturn in the UK and globally. Compared to H2 2022, there is much less worry about credit conditions and financial market disruption. But there has also been a spike in concern around regulation and taxation.

According to the survey, geopolitical risk is the most likely to materialise, followed by inflation and a massive cyber attack. Fears around inflation have declined over the last half, but still 45% of respondents ranked inflation as one of the five most likely systemic risks to materialise. The share of those worrying about UK political risk decreased 10%, but those concerned about an economic downturn in the UK increased from 20% in H2 2022 to 25% in the first half of this year.

Although expectations of a high-impact event in the short and medium term are declining, the perceived probability that one will strike is still higher than the average dating back to 2019. By each measure, geopolitical uncertainty, high inflation and cyber attacks are the most significant risks to the UK’s financial stability.