UK financial system under pressure amid market turmoil – analysts

LONDON, Oct 17 (Reuters) – Britain’s banks and financial firms are facing growing strains from rising funding costs and deteriorating household finances, analysts warned on Monday, as the government tightens trying to stem a dramatic loss of confidence among investors.

Ratings agency Moody’s said the turmoil in government bond markets “jeopardizes financial stability”, putting pressure on a wide range of financial firms, from pension funds to banks and other lenders.

Yields on government bonds soared last month after then-finance minister Kwasi Kwarteng announced billions of pounds in unfunded tax cuts, sending mortgage prices soaring as as banks rush to pass on their own increased funding costs.

Falling asset prices risk creating a “negative feedback loop” of fire selling, Moody’s warned, saying central bank measures to support the market have helped prevent this so far.

Britain’s mortgage market is also facing significant strain as households struggle to cope with soaring home loan costs, investment bank Morgan Stanley said.

Between 30 and 40% of low-income households will face difficulty paying their mortgages, with average rates for some fixed-rate products now above 6%, the bank estimates.

New Finance Minister Jeremy Hunt said on Monday the government would raise £32billion a year in additional revenue as it sought to restore investor confidence in the country’s fiscal credibility. Read more

Although some calm has been restored to the markets, Morgan Stanley’s rating said ahead of Hunt’s announcement that it did not expect mortgage rates to fall quickly and volumes to stagnate in 2023 at instead of increasing by 2.5% as previously forecast.

Not all banking analysts have a bearish view. UK banks are oversold, Berenberg analysts said in their own note on Monday, adding that a boost in profits from higher rates would likely offset a plausible increase in loan losses.

UK banks are due to release their third quarter results next week.

Investors are already wondering if banks’ risk models are up to the task of identifying which home loans can turn sour when unemployment is low but household budgets are nonetheless tight, Reuters reported last week. . Read more

Shares of the country’s banks have oscillated sharply since the September 23 budget announcement, with Lloyds down 10%, against a 1.7% drop in the benchmark FTSE 100 index. (.FTSE).

Reporting by Iain Withers and Lawrence White, editing by Bernadette Baum

Our standards: The Thomson Reuters Trust Principles.

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Don F. Davis