City firms grow fearful of growing financial risks

It is perhaps not surprising that big City firms surveyed by the Bank of England are worried about the impact of the eurozone crisis and a sudden economic downturn might have on the financial system. But when set out in black and white in the Bank's latest systemic risk survey , the findings might seem slightly alarming. Asked about their confidence in the UK financial system over the next three years, and how their confidence levels had changed over the past six months, the responses show that confidence has fallen sharply. A net balance of 59% of respondents reported decreased confidence. The survey was conducted between 20 September and 21 October 2011 of 68 major firms, such as banks, building societies, hedge funds and insurers. The perceived probability of a "future high-impact event" in the UK financial system increased sharply in the second half of 2011, compared with the first half of the year, and was reported to be at the highest level since the survey began in July 2008. The five risks reported most frequently by respondents to have the greatest impact on the UK financial system if they were to materialise were: • sovere ign risk (cited by 76% of respondents) • the risk of an economic downturn (76%) • funding risk (57%) • risks around regulation/taxes (38%) • the risk of financial institution failure/distress (26%). The Bank of England, which first conducted the survey in July 2008, said there was broad agreement that sovereign risk had the greatest potential impact – and more respondents now cited this as a worry since the survey started in July 2008. An economic downturn was the second most frequently cited risk. Interestingly, while respondents' confidence in the stability of the UK financial system had fallen, it only fell to its lowest level since the second half of 2009, with 28% not very confident and 57% only fairly confident.