By Huw Jones
LONDON (Reuters) -The Bank of England said on Monday that banks may be underestimating their exposure to private equity and to commodity markets at a time when rising interest rates could squeeze liquidity in markets.
Nathanael Benjamin, the BoE’s executive director for authorisations and international banks, set out his priorities for the coming year.
Swathes of banking staff had only known a benign interest rate environment and they have had a baptism of fire over the past year as central banks hiked rates, he said.
The impact of any breakdown on credit markets of consensus on the economic outlook could be significant, he said.
“So we intend to closely monitor private asset financing, and it is important that firms think about those hidden risks they could face, including as they assess and set limits for large counterparty exposure,” Benjamin told a UK Finance event.
Scrutinising banks’ exposure to the interplay between commodity markets and climate change is another priority, Benjamin said.
“All banks, commodities house or otherwise, need to be up to the task of identifying those connections pro-actively, and anticipating when and where these risks could emerge, because ultimately when they crystallise for the broader economy, they crystallise for banks too,” he said.
He cautioned banks against moving into business areas not in their “DNA”, such as cryptoassets due to pressure from customers, though this has eased due to spectacular blow-ups in the sector.
“It just illustrates why it’s quite important for banks to ensure that they have done their own homework,” Benjamin said.
He said the central bank will also reflect on the threshold for a foreign bank branch to become a subsidiary, making it easier to shut down or sell off in a crisis, as seen with the British arm of collapsed lender U.S. Silicon Valley Bank.
Last week Britain approved a new law that will require the BoE to consider the market’s global competitiveness when writing financial rules.
Britain’s attraction as a place to do business was in large part due to its safety in turbulent waters, Benjamin said.
