# Frothy stock market valuations, a dash for cash and digital money – all on Bank of England’s risk radar Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2021-08-13 Category: NEWS Category URL: https://financedigest.com/category/news Meta Title: Bank of England Financial Stability Report July 2021 Meta Description: Learn how the Bank of England is supporting the UK economy through the pandemic with strong banking sector liquidity and support for businesses and consumers. URL: https://financedigest.com/frothy-stock-market-valuations-a-dash-for-cash-and-digital-money-all-on-bank-of-englands-risk-radarhtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/news-headline-on-mobile-for-online-information-or-mediafych1zdo-sbi-300166590-1736838019617-compressed.jpg) - The economic outlook has improved, but risks to the recovery remain. - Banks have the capital and liquidity to be able to support the economy. - Risky asset prices have continued to increase, partly due to higher risk taking. - New monetary tools being explored to stop a ‘dash for cash’. - [Bank of England testing financial sector’s](https://www.financedigest.com/improving-reputation-in-the-banking-sector-through-marketing-communications.html "IMPROVING REPUTATION IN THE BANKING SECTOR THROUGH MARKETING COMMUNICATIONS") resilience to climate change. - Spotlight turned on digital money. BofE has released its [financial stability](https://www.financedigest.com/digital-pound-could-hit-financial-stability-and-erode-privacy-uk-lawmakers-warn.html "Digital pound could hit financial stability and erode privacy, UK lawmakers warn") report [Financial Stability Report – July 2021 \| Bank of England](https://gbr01.safelinks.protection.outlook.com/?url=https%3A%2F%2F74n5c4m7.r.eu-west-1.awstrack.me%2FL0%2Fhttps%3A%252F%252Fwww.bankofengland.co.uk%252Ffinancial-stability-report%252F2021%252Fjuly-2021%2F1%2F0102017a9edc91ad-db30d704-1864-42aa-98c2-5f590c7d698f-000000%2FpkKBEFrrYIxS-ly5tmyVHxBYqhs%3D226&data=04%7C01%7CSusannah.Streeter%40hl.co.uk%7C803dabd2922f4d481aa608d946931a01%7C90578e2dfce84c57a1a62b4909a9dc4d%7C0%7C0%7C637618419881656963%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C1000&sdata=4l6LqApap8f6flJsSq1RzVdjgDi5O2LfI%2BgbF65NSS8%3D&reserved=0) Susannah Streeter, senior [investment and markets](https://www.financedigest.com/hsbc-appoints-new-markets-head-amid-wider-investment-bank-reshuffle.html "HSBC appoints new markets head amid wider investment bank reshuffle") analyst, Hargreaves Lansdown: ‘’The Bank of England has rolled with the good news first by applauding the [banking sector’s resilience for steering the UK economy through the pandemic and for having the liquidity](https://www.financedigest.com/strategies-banks-use-to-manage-liquidity-risk.html "Strategies Banks Use to Manage Liquidity Risk") to withstand further punches. [Banks have clearly played a key role in helping businesses and consumers survive](https://www.financedigest.com/the-survival-of-the-banking-industry.html "THE SURVIVAL OF THE BANKING INDUSTRY") the financial crisis by extending loan terms, offering payment holidays and providing a bridge over troubles waters. [Government loan schemes](https://www.financedigest.com/how-to-prepare-your-business-for-the-end-of-the-governments-furlough-scheme.html "How to prepare your business for the end of the government’s furlough scheme") have also been a lifeline. Since March 2020, UK businesses have raised  around £76 billion of net additional financing from UK [banks and global financial markets](https://www.financedigest.com/oil-markets-steady-as-investors-weigh-banking-crisis-russia.html "Oil markets steady as investors weigh banking crisis, Russia"). That has helped [businesses’ cash balances increase](https://www.financedigest.com/frances-ynsect-to-refocus-bug-business-after-capital-increase.html "France’s Ynsect to refocus bug business after capital increase") by a quarter, around £132 billion since the end of 2019. We are not out of the danger zone just yet, with the recovery still fragile. The economy is still going to need a helping hand to emerge with growing strength from the combined effects of the Covid shock and the withdrawal from the European Union, so keeping the tap of [bank funding](https://www.financedigest.com/bank-funding-for-renewables-stagnates-vs-oil-and-gas-report.html "Bank funding for renewables stagnates vs oil and gas – report") on will be crucial to help viable, productive businesses stay afloat. To stop a squeeze on bank lending, the UK’s countercyclical [capital buffer](https://www.financedigest.com/austrian-regulator-orders-system-relevant-banks-to-up-capital-buffers.html "Austrian regulator orders system-relevant banks to up capital buffers") rate of 0% will be kept until December 2021 as a precaution, with any change not coming in until the end of 2022. If the economy does take a turn for the worse, and unemployment rises, banks should brace themselves for loans turning [bad on consumer credit rather than mortgages with more defaults on loans](https://www.financedigest.com/4-ways-to-get-a-bad-credit-loan.html "4 Ways to Get a Bad Credit Loan") and credit cards historically linked to job losses. While the housing market has been red hot, the [Bank of England](https://www.financedigest.com/bank-of-england-fines-former-tsb-executive-over-2018-it-failure.html "Bank of England fines former TSB executive over 2018 IT failure") doesn’t expect demand to drop like a stone after the stamp duty holiday comes to an end, given that interest rates are still attractively low. Like in other economies the race to find space and adapt to working from home long term are [trends expected to continue](https://www.financedigest.com/volkswagen-strikes-below-inflation-wage-deal-continues-german-trend.html "Volkswagen strikes below-inflation wage deal, continues German trend"). What is now flashing a [warning light for the Bank](https://www.financedigest.com/the-recent-bank-of-england-meeting-the-biggest-rate-hike-recession-warning-and-the-fallout.html "The recent Bank of England meeting, the biggest rate hike, recession warning and the fallout") is the increase in risky asset prices with valuations high on an historic basis. Its concerned that the [search for higher returns](https://www.financedigest.com/andalucian-open-returns-to-costa-del-golf-as-golfers-go-in-search-of-the-perfect-pad-close-to-the-fairway.html "Andalucian Open returns to ‘Costa del Golf’ as golfers go in search of the perfect pad close to the fairway") in a low interest rate environment is leading to higher risk taking. It’s singled out high [yield corporate bonds](https://www.financedigest.com/wall-st-stocks-fall-bond-yields-rise-as-china-drops-quarantine-rule.html "Wall St stocks fall, bond yields rise as China drops quarantine rule") and evidence of loose underwriting standards, as a particular cause for concern, as firms which have borrowed up to the hilt could see a dramatic reversal of fortunes which could accelerate economic downturns. The Bank of England is [warning that sharp corrections could be on the way if worries rear up about inflation and a higher interest rate](https://www.financedigest.com/powells-warning-on-higher-u-s-rates-pushes-dollar-to-3-mth-high.html "Powell’s warning on higher U.S. rates pushes dollar to 3-mth high") environment. It is clearly concerned that there could be a knock on effect on the [finance available for households and businesses](https://www.financedigest.com/finance-management-for-small-business.html "Finance management for small business"). Already we’ve seen financial [markets wobble as central banks flag price rises](https://www.financedigest.com/in-a-rising-market-are-banking-outsourcers-pulling-their-weight.html "In a rising market, are banking outsourcers pulling their weight?"), with growth stocks in particular taking seeing small corrections. The [Bank of England is clearly fearful this could amplify as markets come off the drug of cheap money](https://www.financedigest.com/marketmind-banks-are-leaking-money.html "Marketmind: Banks are leaking money"). Like a family elder trying to make its younger relatives more responsible so it can take a step back, the [Bank of England is also trying to lay the groundwork to limit central bank involvement in future](https://www.financedigest.com/bank-of-the-future.html "Bank of the future") market turmoil. The dash for cash as the pandemic unfolded saw  huge losses in March 2020 and the [financial market volatility led to central banks](https://www.financedigest.com/inflation-trumps-financial-risks-as-central-bank-tightening-set-to-continue.html "Inflation trumps financial risks as central bank tightening set to continue") stepping in to calm the storm. The Bank of England wants to see reforms to enhance the resilience of [money market funds](https://www.financedigest.com/explainer-why-european-money-market-funds-inflows-are-lagging-behind-the-u-s-torrent.html "Explainer-Why European money market funds inflows are lagging behind the U.S. torrent?") and better understand the role of leveraged investors in bond markets and the preparedness for margin calls in a high stress environment. The Bank is also clearly worried that central [banks are running out of the weapons needed](https://www.financedigest.com/bank-of-england-still-needs-to-see-the-job-through-on-inflation-pill.html "Bank of England still needs to ‘see the job through’ on inflation: Pill") to help fight future crises in financial markets system. Already the arsenal has been depleted, with ultra-low interest [rates and mass bond](https://www.financedigest.com/stocks-bonds-extend-rally-on-hopes-rate-hikes-ease.html "Stocks, bonds extend rally on hopes rate hikes ease") buying programmes still in force. So it wants to find new tools to tinker with system, which crucially don’t encourage risk taking, given the concerns that loose monetary [policy is seen](https://www.financedigest.com/opec-seen-sticking-to-policy-despite-higher-oil-demand.html "OPEC+ seen sticking to policy despite higher oil demand") as partly behind the current frothy valuations of some assets. There are fresh threats looming, not least climate change and the Bank is already testing the resilience of [banks and insurers](https://www.financedigest.com/swiss-regulator-monitoring-banks-and-insurers-after-svb-collapse.html "Swiss regulator monitoring banks and insurers after SVB collapse") for their ability to withstand and transition to new environment and low carbon targets. The revolution in the global [payments system is also on the bank’s](https://www.financedigest.com/crown-agents-bank-owner-explores-sale-of-british-payments-group-sources.html "Crown Agents Bank owner explores sale of British payments group –sources") radar given how critical its smooth running is to financial stability. It has highlighted the [need for regulators to keep up with digital](https://www.financedigest.com/britains-digital-banks-need-support-amid-banking-turmoil-trade-body.html "Britain’s digital banks need support amid banking turmoil – trade body") coin developments, and ensure the public have the confidence and trust to use digital money. It has again flagged stable coins, pegged to fiat currencies, as systemically important, indicating that these are likely to be a central feature in the monetary system going forward.’’ --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---