War fallout highlights ‘fragilities’ in financial system, says Britain’s top central banker – POLITICO

LONDON — Russia’s attack on Ukraine is putting additional pressure on the global financial system, which is already facing heightened risks from shadow banking, cryptocurrency, cloud usage and cyber defence, according to Jon Cunliffe of the Bank of England.

At the same time, the war has rocked commodity markets, from gas and oil to metals and food, sending shockwaves through the financial system and driving up consumer prices, Cunliffe said. , who is the Bank’s Deputy Governor for Financial Stability.

The Bank still sees little scope for banks to increase their capital requirements, he told POLITICO in his Threadneedle Street office. But for “banks that are involved in commodities and trading commodities, the risks will have changed by now because of the sanctions,” he noted.

Yet he pointed out that volatility had already built up in global financial markets before the war, due to rising inflation and monetary tightening – themes the Bank outlined in its most recent financial stability report in December.

The Bank of England was one of the first institutions to raise key interest rates, with three increases so far this year and more expected as prices continue to climb, while the European Central Bank and the US Federal Reserve are expected to stick to the tightening path as Well.

The imposition of sanctions against Russia and the subsequent spike in commodity prices only added to the existing uncertainty, Cunliffe said.

“We have seen higher inflation coming out of [the pandemic]. We see the prospect of higher interest rates. And the market was adjusting to that around the major markets. And it continues,” he said. “But the way it’s complicated by the overlay of Ukraine is quite complex.”

Cunliffe pointed to a web of risks that connect the weak links in global non-bank finance, which spread in 2020 when a “money rush” threatened to melt international bond markets, forcing central banks to inject billions of fresh money. It could be much more difficult now that inflation is at multi-decade highs in Europe, the United States and the United Kingdom, he said.

“You have a lot of different things that move the financial markets, and it’s a bit uncomfortable to always have those fragilities,” he said. “I don’t know what the triggers could be, because I don’t know how the Ukrainian crisis is going to play out.”

He also cited cryptocurrency markets, which suffer from a “lack of transparency” and have seen increased activity since the war began. Still, the “exit ramps” where digital assets are converted into state-backed currency “are not huge,” he noted, so they cannot be used to evade sanctions.” in large scale”.

Similarly, Russian cyberwar threats against Ukraine’s Western partners have exposed existing flaws in digital banking and trade services, and exposed how IT service providers are protecting banks and their customers. against attacks. “When [providers] provide these services to the financial industry, we need assurance on the standards,” he said. “We need assurance as to whether they have been tested. There is a need for penetration testing.”

Trip to Brussels

Cunliffe, a capital markets specialist who has worked throughout his career with international institutions such as the EU and the International Monetary Fund, also played an important role in the rush to craft sanctions against the Kremlin, when acting as an adviser to the United Kingdom. government in the G7 talks. A longtime civil servant and central banker, he said he considers working in the public sector “a bit of a privilege”.

And in news that caught the eye of the European bubble, Cunliffe accompanied its boss, Andrew Bailey, on a visit to Brussels last week. But to date, neither Cunliffe nor the Bank have provided many details about the purpose of the visit.

“A lot of it was about Ukraine, and the impact of the sanctions and the economic situation we’re seeing,” he said. He was quick to add that the trip “did not concern” the outstanding points of contention left by Brexit, such as non-existent equivalence decisions for the British financial industry or a memorandum of understanding on cooperation in financial policy which the Commission refrained from adopting for more than a year. .

“It was just to go talk to people about what they had in mind,” he said. “There was good cooperation on the response to Russian aggression in Ukraine. But the other issues we talked about…are separate from that.”

More broadly, he said, his “EU contacts have never been frozen”, Brexit notwithstanding. “Our two economies are closely linked, our financial sectors are closely linked.”

“What the war in Ukraine has done is shine a light on geopolitics and risks on the European continent,” he said.

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Don F. Davis