Will at that place be another financial crisis?

There will be another and it won't exist the same as the last.
This page was last updated on x January 2019.

History shows that there are two things we tin be certain of when information technology comes to financial crises: at that place will be some other one, and the next i won't be the same as the concluding.

That'south a big trouble considering they can be very damaging.

A financial crisis causes so much damage considering people rely on financial institutions every day: banks provide debit cards so we tin pay for things more easily; pension providers aid us plan for the future; and insurance companies provide encompass in the event that our holding are damaged, lost or stolen.

When a crunch hits, the after-effects can be felt for many years after. Looking at various examples throughout history, one estimate places the full economic price of a typical fiscal crisis at effectually 75% of GDP. That'due south equivalent to £21,000 for every person in the UK.

Take the 2007-08 fiscal crisis, which was ane of the nigh astringent always seen. Some fiscal markets effectively closed. Others were so badly damaged that businesses and households were unable to get the finance they needed. As a result the United kingdom economy suffered the deepest recession since the 2nd World War.

That led to a real affect on wages, jobs and access to credit for people beyond the country.

i million

Increase in the number of people without jobs.

5%

Autumn in wages beneath 2007 levels.

Bank lending

Footing to a complete halt.

Where volition the next financial crisis come from?

History tells us there are many dissimilar causes of crises – some more bizarre than others.

For case, in 1636, "tulip mania" took hold in the Netherlands. As the price of tulip bulbs went up and up, information technology is said that people spent their life savings to buy them. Simply this craze came to an abrupt cease and the cost of tulips crashed, causing huge losses and a slowdown in the Dutch economy.

No one tin say where the next crisis will come from.

But what we exercise know is that the next crisis will be different from past crises: history may rhyme, but it rarely repeats.

How is the fiscal world different today?

The way we look later the financial system has changed.

To reduce the chances of a crisis occurring, it is now the Banking concern of England's job to:

Individual banks

Ensure that individual banks have sufficient financial resources - in skillful times as well as bad.

Entire fiscal organisation

Scan the unabridged fiscal organisation as a whole for risks.

What is stress testing?

The Bank also carries out "stress tests". These involve looking at a range of "what if" scenarios – such every bit a sudden downturn in economic conditions – and checking that banks would be able to cope.

Bank of England's KnowledgeBank guide on stress-testing.

  • Hi my name is Noor and I work at the Bank of England. Hither at the Bank of England, we demand to proceed an centre on how banks would cope with hard economic situations. We do this by stress testing banks, against various hypothetical scenarios. The Bank of England then ensures that should these situations occur, banks concur sufficient majuscule to meet unexpected losses.

    From 2016, we will use two 'what if' scenarios to test banks. The first volition be a yearly test of daze scenarios of dissimilar levels of severity, based on the United kingdom current economic bicycle. The annual cyclical scenario could include falls in output or house prices or increases in interest rates or unemployment. The second will exist an exploratory scenario every two years. This scenario will expect at risks that are unlikely to happen but are still a concern, for example what might happen if a big bank fails. Banks take always been required to hold a minimum amount of capital to blot losses, but from 2016 how the Depository financial institution of England looks at stress test performance is changing. With larger and more risky banks needing to behave more than loss absorbing capital.

    Should a banking concern non perform satisfactorily, the Banking company of England has a range of powers, such as requiring the depository financial institution to take action to strengthen its capital position within a certain period of time.

At that place take been other important changes, also.

In the event that a big commercial banking concern did go bust today, the Bank of England now has the powers to deal with the state of affairs in an orderly way. Crucially, there would no longer be a need for the UK authorities to bail-out a failing bank at the expense of taxpayers. We also require banks to prepare for their own failure then we can use our powers as rapidly and effectively as possible.

What does the future have in store?

The vote to leave the European Union in June 2016 led to a lot of uncertainty surrounding the future of the UK's trading arrangements. The Bank of England cut interest rates and appear other measures to increase the amount of spending in the United kingdom economy, which in plough will boost employment and wages.

The leave vote jolted fiscal markets merely we have made sure that banks now have substantial financial resources to assistance them weather condition this and any futurity tempest.

And so the arrangement is much safer today than it was in 2007-08.

Only no one tin prevent crises from ever taking identify again.

It is the Bank of England'southward role to monitor and assess the risks that are out there and to apply the tools it has at its disposal to maintain a stable financial organization.

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