The Bank of England’s latest financial stability report has warned on the costs of asset management, alongside banking and insurance, rising following the UK’s exit from the EU.
The report says: “If asset management were to fragment between the United Kingdom and Europe, material economies of scale and scope that are currently achieved by pooling of funds and their management would be reduced.”
According to the Investment Association, 40 per cent of the assets managed in the UK are managed for overseas clients with around half of this on behalf of clients outside Europe.
Speaking at a press conference following the report’s release, Bank of England governor Mark Carney says Brexit presents a number of potential risks to financial stability.
“The inconsistency in the valuation of some assets, such as commercial real estate and corporate bonds, and the risks implied in very low long-term interest rates make those assets vulnerable to a repricing. Whether through an increase in long-term interest rates, adjustments to growth expectations or both,” Carney says.
He also raised concerns about consumer credit growth outpacing household income.
“Notable increases across credit cards, personal loans and auto finance. In an environment of intense competition interest margins have fallen and risk assessments by lenders have declined. Lenders are therefore more vulnerable to losses and stress.”
Carney would not be drawn on whether the results of the general election, which failed to produce a majority government, increased those odds of a shock to financial stability.
“Our responsibility is to look at the tail of the distribution; what could go wrong,” Carney says. “Some of those scenarios, however unlikely they may be, it’s not our job to make point estimates of the probability of the end of this process concluding without an agreement.”