WEBVTT - In the City: How Stable Is the UK Financial System? 

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news. So we all know

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<v Speaker 1>what the MPC is, Monte Policy Committee at the Bank

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<v Speaker 1>of England. Do you know what the FPC is.

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<v Speaker 2>Yeah, Financial Policy Committee, I now know, but I am

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<v Speaker 2>not surprised that exists.

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<v Speaker 1>And they look basically at the financial shocks that institutions

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<v Speaker 1>could go through and they try and support them in

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<v Speaker 1>understanding where the risks lie but also how they can

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<v Speaker 1>help with growth.

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<v Speaker 3>Yeah.

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<v Speaker 2>I mean, it must be quite an exciting, slash terrifying

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<v Speaker 2>role to have to imagine the very worst shocks, even

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<v Speaker 2>worse than we've seen already, that the banking system could endure.

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<v Speaker 1>So there was a big report that came out on Friday.

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<v Speaker 1>We're going to get into the latest report and dig

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<v Speaker 1>deep to understand what it means for financial institutions and

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<v Speaker 1>where the big risks lie and why this time it's

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<v Speaker 1>a little bit different.

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<v Speaker 2>Welcome to the City of London, the City of London Bank.

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<v Speaker 2>We need to mind the gap between the t and

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<v Speaker 2>the financial hearts of the country.

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<v Speaker 1>The city, the city.

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<v Speaker 2>Welcome to in the city.

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<v Speaker 1>Stand clear of the doors. I'm Francin Laqua, I'm alecro

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<v Speaker 1>Stratton and this week I look at the recent Financial

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<v Speaker 1>Stability Report, what it tells us about how prepared finance

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<v Speaker 1>firms are in times of a crisis. And with us

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<v Speaker 1>Nat Benjamin, who's appointed Executive Director for Financial Stability, Strategy

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<v Speaker 1>and Risk, and of course he is also a member

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<v Speaker 1>of the Financial Policy and Committee. So Nat, thank you

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<v Speaker 1>and welcome to in the city.

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<v Speaker 3>Thank you very much, thank you for having me. It's

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<v Speaker 3>pleasure to be with you.

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<v Speaker 1>Talk to us a little bit about the the FPC.

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<v Speaker 3>There's a number of ways in which the Bank of

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<v Speaker 3>England watches over is to financial stability, and one way

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<v Speaker 3>of doing it is to ensure that individual institutions within

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<v Speaker 3>the financial sector are safe and sound. But another way

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<v Speaker 3>to look at it is to check that the sum

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<v Speaker 3>of the parts adds up and only focusing on individual

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<v Speaker 3>firms is not going to be enough. And that is

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<v Speaker 3>the focus of the Financial Policy Committee, which is to

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<v Speaker 3>ensure that the system as a whole, the financial sector

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<v Speaker 3>as a whole, does its job of ensuring vital services

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<v Speaker 3>to the real economy, to households and business people's ability

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<v Speaker 3>to save, to pay, to borrow what they can afford,

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<v Speaker 3>to invest and to ensure themselves. So that is the

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<v Speaker 3>focus and systemic risks on the focus of the FBC.

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<v Speaker 3>So what do we do while we work to spot them,

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<v Speaker 3>to track them, and to take action to address them.

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<v Speaker 3>And every quarter we get together and we see what

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<v Speaker 3>we think about the key outlook for financial stability at

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<v Speaker 3>a given juncture. But also we consider our more structural

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<v Speaker 3>issues with the financial sector, longer term issues, and that

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<v Speaker 3>is what we did us.

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<v Speaker 1>For how do you look at some of the risks

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<v Speaker 1>out there.

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<v Speaker 3>We had quite a lot of things to say last Friday,

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<v Speaker 3>first the state of the conjuncture at that particular point

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<v Speaker 3>in time, but also we had published the results of

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<v Speaker 3>our stress test of the banks. We had done a

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<v Speaker 3>Desk Bay stress test of the banks to check that

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<v Speaker 3>were strong enough to support the real economy, both in

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<v Speaker 3>good times and in bad time. We had also completed

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<v Speaker 3>and published the result of our systemoid exploratory scenario. So

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<v Speaker 3>that was quite a pioneering initiative. I don't think it's

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<v Speaker 3>been done before, and we're very proud of it. And

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<v Speaker 3>this is the first time we stressed as the entire

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<v Speaker 3>financial sector, one part of the financial sector, rather not

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<v Speaker 3>just just the banks or just the insurance companies. And

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<v Speaker 3>it's very exciting.

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<v Speaker 1>So it was four hundred pages, right, read it all.

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<v Speaker 2>And what does it show? I did read it all,

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<v Speaker 2>but in your own words, what does it show?

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<v Speaker 3>So the first thing was just to show the value

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<v Speaker 3>of such exercises, where instead of just shocking the system

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<v Speaker 3>and seeing what happens, we don't assume the reaction function

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<v Speaker 3>of different players in that ecosystem. We do a flow test,

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<v Speaker 3>so we actually ask them how they would react, and

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<v Speaker 3>then in the second round we factor that in to

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<v Speaker 3>see how a shock plays are we impulse a shock

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<v Speaker 3>on markets that are core to the UK economy and

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<v Speaker 3>we see how it plays out. And now what shocks

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<v Speaker 3>several different markets, different variables, market variables, interest rates, credit variables,

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<v Speaker 3>very severe stress and in combination is probably more severe

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<v Speaker 3>than anything we've seen before, including the financial crash, including

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<v Speaker 3>financial crash, and we apply that to markets that are

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<v Speaker 3>core to the economy like the guilt market, the guilt

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<v Speaker 3>repot market, in the sterling corporate bond market and associated

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<v Speaker 3>interest rates derivatives.

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<v Speaker 2>And even in that scenario, that highest stress scenario, worse

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<v Speaker 2>than the financial crash, did the UK economy start not

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<v Speaker 2>to it or fall ever?

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<v Speaker 3>So what we tested in that system wise exploratory scenario

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<v Speaker 3>was the resilience of those core markets. And the good

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<v Speaker 3>news was that market was proved to be more resilience

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<v Speaker 3>than it was before. That was a positive news. But

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<v Speaker 3>there's no reason.

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<v Speaker 1>For there's always a negative, isn't there.

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<v Speaker 3>Exactly, Well, there's no reason for complacency because those things

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<v Speaker 3>can change fast. So what we need to do is

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<v Speaker 3>to ensure we look in that improvement in resilience to

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<v Speaker 3>deal with whatever the future can bring. That is one conclusion.

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<v Speaker 3>But the other thing we found is that there was

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<v Speaker 3>a very large redistribution of liquidity across the financial sector

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<v Speaker 3>between participants, and the other thing we found is that

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<v Speaker 3>the behavior of market participants amplified the shock, made it worse.

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<v Speaker 1>But you're also one that basically hedge funds, right asset managers,

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<v Speaker 1>and pension providers could be unprepared in times of crisis.

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<v Speaker 3>So that is so.

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<v Speaker 1>There's a part of the financial system which is much

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<v Speaker 1>more risky than the rest.

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<v Speaker 3>That is the fact that I mean the value of

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<v Speaker 3>those exercises to put the spotlight on these things in

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<v Speaker 3>peace time so that everyone gets prepared for when shocks happen.

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<v Speaker 3>So I'll give you an example what we found is

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<v Speaker 3>that a number of market participants, for example, hedgephones, we're

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<v Speaker 3>assuming that if the shock happened, they would be able

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<v Speaker 3>to get extra repot from their banks. And actually we

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<v Speaker 3>asked the banks and the bank said, no, there's not

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<v Speaker 3>going to be more repo. That's an interesting finding. We've

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<v Speaker 3>faded back to the hedgehorons participants so that they can

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<v Speaker 3>factor that in in their own risk management, in their

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<v Speaker 3>own stress testing.

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<v Speaker 1>And I remember being told that, you know, shadow banking

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<v Speaker 1>was the biggest heart spot when interest rates would go up,

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<v Speaker 1>but we haven't really seen that much blow up.

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<v Speaker 3>Well, if you look back at the last five years,

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<v Speaker 3>and I think about those last five years as a

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<v Speaker 3>period of transition away from the post global financial crisis area,

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<v Speaker 3>which is very unique in many respects, into a new norm.

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<v Speaker 3>We're transitioning, and there has been bits of turbulence over

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<v Speaker 3>the last five years. Actually would be a bit bizarre

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<v Speaker 3>if they hadn't been. But every single time we think

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<v Speaker 3>about the archae goos, you think about the dash for cash,

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<v Speaker 3>you think about the LDI think about Nickel. Every single

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<v Speaker 3>time the shock was amplified by those vulnerabilities, by margining practices,

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<v Speaker 3>by the fact that haircuts used to be zero in

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<v Speaker 3>their ramp up very suddenly and the margin call comes

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<v Speaker 3>and there's a big margin call and the counterparty scramss

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<v Speaker 3>around for cash, and that can have a very destabilizing

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<v Speaker 3>effect on financial stability and especially on the markets on

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<v Speaker 3>which those strategies are anchored. So that is why, in

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<v Speaker 3>particular the international policy work which is aiming at those

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<v Speaker 3>vulnerabilities is particularly important. And it's important that these things

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<v Speaker 3>are sorted out in peace time so that you know

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<v Speaker 3>when the shocks happen, well, there isn't such a ramp

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<v Speaker 3>up in the size of the calls or the liquidity.

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<v Speaker 2>So it sounds like you have a function to sort

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<v Speaker 2>of teach some practitioners across the city of London, to

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<v Speaker 2>bring them in and say this is the evidence from

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<v Speaker 2>our analysis and our exercise, and we suggest you behave

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<v Speaker 2>differently in future.

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<v Speaker 3>Well, you see, this has been a really good aspect

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<v Speaker 3>of this particular science. It's just the tone of the conversation.

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<v Speaker 3>It's not an exercise we've done to punish anyone. It's

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<v Speaker 3>just an exercise to find out what would actually happen.

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<v Speaker 3>It is not just in the interest of the Bank

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<v Speaker 3>of England to ensure those markets are resilient. This is

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<v Speaker 3>in the interest of everyone and of all the participants

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<v Speaker 3>because they do business in those markets. And the quality

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<v Speaker 3>of the ton of the conversation was really good, and

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<v Speaker 3>we've got really good feedback from the participants because what

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<v Speaker 3>we've been doing is to be almost maximalist in how

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<v Speaker 3>much we share back to them from what we learn.

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<v Speaker 2>We've talked a lot about how the system might handle

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<v Speaker 2>the sharks, but let's talk about those sharks. And you

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<v Speaker 2>keep talking about peace time, but it's actually quite a

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<v Speaker 2>fraud geopolitical environment right now. When you look at the news,

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<v Speaker 2>when you look at the developments out of America, out

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<v Speaker 2>of Europe and so on. These are the kind of

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<v Speaker 2>shocks you're talking about the system handling, as well as

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<v Speaker 2>more sort of acutely financial ones, aren't they.

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<v Speaker 3>That's right. So, I mean, one of the things we've

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<v Speaker 3>set out last Friday is that global risks are high,

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<v Speaker 3>and the uncertainty and the degree of risk around the

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<v Speaker 3>outlooks has increased, and it matters, particularly because the risk

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<v Speaker 3>of global fragmentation is higher, and fragmentation is not good

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<v Speaker 3>for trades, for financial markets, or for international collaboration and cooperation,

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<v Speaker 3>And there was already pressures on sovereign debts in a

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<v Speaker 3>range of advanced economies, and those pressures have increased. So yes,

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<v Speaker 3>the outlook, the global outlook has become.

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<v Speaker 2>Strict, isn't it because you published last week? But in

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<v Speaker 2>some ways this is a watching brief for all of

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<v Speaker 2>us knowing exactly what the complexion of the Trump decisions

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<v Speaker 2>and so on will be. Does that not matter you

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<v Speaker 2>were did you model, for instance, a tariff regime of

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<v Speaker 2>x percent on UK exports and imports being affected too.

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<v Speaker 3>I mean, this is not about any one country in particular.

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<v Speaker 3>This is a global phenomenon, and on tariff specifically, It's

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<v Speaker 3>too early to tell the impacts that tariffs can have.

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<v Speaker 3>It depends on the reaction function of different jurisdictions. It

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<v Speaker 3>depends on the actual channels that it takes, whether it

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<v Speaker 3>causes inflationary pressure, where the impact is on exchange rates,

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<v Speaker 3>et cetera. And it is not clear keet is not

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<v Speaker 3>obvious that tariffs in and of themselves might have impacts

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<v Speaker 3>on financial stability. Global fragmentation, however, isn't a good thing

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<v Speaker 3>for financial stability. That is for sure.

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<v Speaker 1>We had a big shark in the UK frankly because

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<v Speaker 1>of pensions under this trust. Could that happen again or

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<v Speaker 1>have they taken provisions for that to be tamed.

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<v Speaker 2>Well.

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<v Speaker 3>One of the things we did tests as part of

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<v Speaker 3>the system WOID exploratory scenario is the guild markets and

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<v Speaker 3>importing a shop and guild markets, and we had over

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<v Speaker 3>fifty participants in the exercise, including pension fonds and the

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<v Speaker 3>LII fonds, and what we saw is that they had

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<v Speaker 3>built that resilience since the events you describe, and they

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<v Speaker 3>had higher liquidity buffers, which meant that they were better

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<v Speaker 3>able to manage that shock. However, as we discussed earlier,

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<v Speaker 3>there were other pockets of potential risks that needed to

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<v Speaker 3>be addressed and managed, and those actions are being taken forward.

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<v Speaker 3>So it's really important that all these improvements are locked in,

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<v Speaker 3>as I said, because things can evolve.

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<v Speaker 1>Now do you believe that actually a lot of these actors,

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<v Speaker 1>the hedge funds, the asset managers will look around and say,

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<v Speaker 1>actually we need to minimize risk.

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<v Speaker 3>I think part of the advantages of doing exercise like

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<v Speaker 3>that where we had great, great engagement from participants like

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<v Speaker 3>hedge funds and asset managers, is that it puts the

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<v Speaker 3>spotlight on some of the risks. It put the spotlights

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<v Speaker 3>on the situation in which actually they might take a loss,

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<v Speaker 3>and that is something they can then factor in their

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<v Speaker 3>own internal contingency planning, the risk management and their own

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<v Speaker 3>stress testing. So that is an important aspect of it,

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<v Speaker 3>so that if shocks do happen in the future, their

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<v Speaker 3>impact is lower and is content.

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<v Speaker 1>Can I ask you about regulation, because we're, again, as

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<v Speaker 1>alluded to, at this juncture where we don't really quite

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<v Speaker 1>know what the US does. If they deregulate the banks,

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<v Speaker 1>if they deregulate some of the private companies, some of

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<v Speaker 1>the private equity, some of the credit companies as well,

0:12:27.600 --> 0:12:30.240
<v Speaker 1>does that put the UK in a difficult position to

0:12:30.320 --> 0:12:31.800
<v Speaker 1>decide what to do?

0:12:32.440 --> 0:12:34.760
<v Speaker 3>Again, this is not a question but an in one country.

0:12:34.800 --> 0:12:38.199
<v Speaker 3>But there are calls at the moment for deregulation. You

0:12:38.240 --> 0:12:41.240
<v Speaker 3>can hear them everywhere. And when I hear that, I

0:12:41.360 --> 0:12:44.440
<v Speaker 3>cannot fail to just go back in time a little

0:12:44.440 --> 0:12:47.719
<v Speaker 3>bit and I remember the mid two thousands where there

0:12:47.720 --> 0:12:52.120
<v Speaker 3>were calls for deregulation and quite frankly, it made our

0:12:52.200 --> 0:12:57.720
<v Speaker 3>job more challenging as regulators and supervisors. And then the

0:12:57.720 --> 0:13:01.080
<v Speaker 3>next thing that happened was the global financial crisis, and

0:13:01.120 --> 0:13:05.480
<v Speaker 3>that crisis resulted in a considerable loss of growth for

0:13:05.800 --> 0:13:10.480
<v Speaker 3>many major advanced economies, including the UK, and way beyond

0:13:10.480 --> 0:13:14.720
<v Speaker 3>the immediate terrible impact for households who are losing their homes,

0:13:15.160 --> 0:13:17.800
<v Speaker 3>but these things cost a very long shadow over time,

0:13:18.720 --> 0:13:22.320
<v Speaker 3>and so I think there's a lesson there. Calls for

0:13:22.360 --> 0:13:25.480
<v Speaker 3>deregulation may sound very appealing in the short term, but

0:13:25.600 --> 0:13:28.720
<v Speaker 3>longer term, the people who paid the price for it

0:13:28.840 --> 0:13:32.000
<v Speaker 3>are the people, the households and the businesses. So it's

0:13:32.040 --> 0:13:35.480
<v Speaker 3>quite important that we remember those lessons from history as

0:13:35.520 --> 0:13:38.959
<v Speaker 3>we look aheat. So, having talked about deregulation and the

0:13:39.040 --> 0:13:41.760
<v Speaker 3>fact that we need to not forget those lessons in

0:13:41.840 --> 0:13:46.960
<v Speaker 3>the past, there is a very legitimate question about whether

0:13:47.679 --> 0:13:52.320
<v Speaker 3>the financial sector is doing enough to support growth generally,

0:13:52.400 --> 0:13:54.920
<v Speaker 3>and I think that's a very legitimate question to ask,

0:13:55.559 --> 0:14:01.320
<v Speaker 3>and in particular in areas like payments, innovation, supports for

0:14:01.480 --> 0:14:06.760
<v Speaker 3>climate transition, finance, or the reform of the pension system.

0:14:07.120 --> 0:14:09.280
<v Speaker 3>Those are areas where it's worth asking the question of

0:14:09.280 --> 0:14:11.800
<v Speaker 3>whether there is more the financial sector can do to

0:14:11.800 --> 0:14:12.480
<v Speaker 3>support growth.

0:14:13.120 --> 0:14:14.880
<v Speaker 1>It's a good question, but it's either you go to

0:14:14.960 --> 0:14:18.000
<v Speaker 1>the US style, which is free market deregulation, or you

0:14:18.200 --> 0:14:20.080
<v Speaker 1>force some of the institutions to do some of the

0:14:20.080 --> 0:14:21.960
<v Speaker 1>things that could eventually help with growth.

0:14:22.400 --> 0:14:24.680
<v Speaker 3>I think the idea is to be mindful of those

0:14:24.760 --> 0:14:26.880
<v Speaker 3>lessons from the past and step into the future, but

0:14:26.960 --> 0:14:27.640
<v Speaker 3>in a safe way.

0:14:28.280 --> 0:14:31.600
<v Speaker 1>How's the interaction between private sector and the bank? Do

0:14:31.600 --> 0:14:33.200
<v Speaker 1>you feel like you're understand Yeah? Do you feel like

0:14:33.240 --> 0:14:34.120
<v Speaker 1>you understand each other?

0:14:34.600 --> 0:14:37.520
<v Speaker 3>I do so. In my previous job, I was supervising

0:14:37.520 --> 0:14:41.120
<v Speaker 3>foreign banks in the UK and in the past I

0:14:41.160 --> 0:14:44.840
<v Speaker 3>was very involved in supervision, so directs bank supervision. There's

0:14:44.840 --> 0:14:47.200
<v Speaker 3>a good degree of engagement. If I take a step

0:14:47.240 --> 0:14:50.760
<v Speaker 3>back and I think about and what the UK to

0:14:50.800 --> 0:14:52.720
<v Speaker 3>be known for as a place to do business, and

0:14:52.840 --> 0:14:54.880
<v Speaker 3>when I one of the UK regulators to be known for,

0:14:55.400 --> 0:14:57.760
<v Speaker 3>I want us to be known for the fact that

0:14:58.080 --> 0:15:00.840
<v Speaker 3>people feel they can talk to us. We're approachable, we

0:15:00.840 --> 0:15:03.040
<v Speaker 3>can have a conversation. I want us to be known

0:15:03.120 --> 0:15:07.360
<v Speaker 3>for actually not kicking up a first for nothing. So

0:15:08.000 --> 0:15:10.440
<v Speaker 3>when we do have an issue, you know, we say

0:15:10.440 --> 0:15:12.080
<v Speaker 3>we have an issue, and we're in business and we

0:15:12.160 --> 0:15:14.320
<v Speaker 3>know what we're talking about, We'll not kicking up a

0:15:14.400 --> 0:15:17.640
<v Speaker 3>fast for nothing. Will be proportionate and I want us

0:15:17.680 --> 0:15:20.840
<v Speaker 3>to be known for a place where we're predictable, so

0:15:20.880 --> 0:15:23.480
<v Speaker 3>we don't spring a surprise on people, and people know

0:15:23.800 --> 0:15:25.960
<v Speaker 3>what our reaction function is. So those are the type

0:15:26.000 --> 0:15:28.240
<v Speaker 3>of things I want the UK to be known for.

0:15:28.280 --> 0:15:31.600
<v Speaker 3>And I think that enables a really good dialogue. And

0:15:31.640 --> 0:15:34.840
<v Speaker 3>actually the quality of the dialogue we've had in this

0:15:34.960 --> 0:15:38.680
<v Speaker 3>system wide exercise has been really good. From that perspective.

0:15:39.440 --> 0:15:42.040
<v Speaker 2>We talked about shocks and politics and geopolitics and so on,

0:15:42.080 --> 0:15:44.440
<v Speaker 2>and your survey shows that's what companies are worried about.

0:15:44.440 --> 0:15:46.560
<v Speaker 2>They're worried about that. They're worried about cyber risk as well.

0:15:46.840 --> 0:15:50.800
<v Speaker 2>But just quickly on households, the evidence from I think

0:15:50.840 --> 0:15:54.200
<v Speaker 2>your report is that households, British households are resilient and

0:15:54.240 --> 0:15:58.480
<v Speaker 2>they're doing okay. They're absorbing the increase or certainly elevated

0:15:58.560 --> 0:16:01.520
<v Speaker 2>mortgage amounts. How long does that last? How long do

0:16:01.600 --> 0:16:05.720
<v Speaker 2>you think you're confident that they will remain if we

0:16:05.760 --> 0:16:07.320
<v Speaker 2>have higher interest rates for longer.

0:16:07.520 --> 0:16:09.680
<v Speaker 3>I mean, part of the transition we're going through is

0:16:09.760 --> 0:16:13.320
<v Speaker 3>that it's the real economy going through that transition with

0:16:13.480 --> 0:16:15.920
<v Speaker 3>a higher interest rates. And overall, as you said, the

0:16:15.960 --> 0:16:19.239
<v Speaker 3>picture is that it has been challenging time for household

0:16:19.640 --> 0:16:25.800
<v Speaker 3>but there's been resilient in aggregate. And there's still material

0:16:25.960 --> 0:16:29.880
<v Speaker 3>proportion of households with mortgage for example, who will have

0:16:29.920 --> 0:16:34.160
<v Speaker 3>to refinance on higher rate than they have at the moment.

0:16:34.640 --> 0:16:37.600
<v Speaker 3>But what we've seen is that for those that have

0:16:37.680 --> 0:16:41.120
<v Speaker 3>to refinance on higher rate, the average increase in monthly

0:16:41.360 --> 0:16:45.600
<v Speaker 3>costs to repair their mortgages is lower now than it

0:16:45.800 --> 0:16:48.840
<v Speaker 3>was projected to be in June, for example. So these

0:16:48.840 --> 0:16:51.360
<v Speaker 3>things all depends the key of market.

0:16:51.120 --> 0:16:53.680
<v Speaker 2>Rates, but still higher.

0:16:53.800 --> 0:16:55.840
<v Speaker 3>So there is a wall coming, yeah, but it's a

0:16:55.880 --> 0:16:57.960
<v Speaker 3>lower wall than it was in the past. And the

0:16:58.000 --> 0:17:00.760
<v Speaker 3>sense so far there have been resiliently and we don't

0:17:00.760 --> 0:17:03.960
<v Speaker 3>see any reason for that not to continue. One thing

0:17:04.000 --> 0:17:08.280
<v Speaker 3>we have observed we talked about why financial stability matters

0:17:08.320 --> 0:17:11.760
<v Speaker 3>is so that the financial sector can support household and

0:17:11.960 --> 0:17:15.920
<v Speaker 3>unlike two thousand and eight, where banks made things worse

0:17:15.960 --> 0:17:19.160
<v Speaker 3>and amplified the shocks, what we've seen recently is banks

0:17:19.200 --> 0:17:24.480
<v Speaker 3>supporting household through those difficult times, for example by giving

0:17:24.520 --> 0:17:28.040
<v Speaker 3>them six months to switch on interest only to repay

0:17:28.040 --> 0:17:30.000
<v Speaker 3>their mortgages to give them time to absorb the shock,

0:17:30.040 --> 0:17:32.280
<v Speaker 3>and then reverting back to full repayment. So those are

0:17:32.320 --> 0:17:35.120
<v Speaker 3>the type of things that a strong banking system can

0:17:35.200 --> 0:17:37.160
<v Speaker 3>do to help the economy through a difficult time.

0:17:37.440 --> 0:17:40.120
<v Speaker 2>The other shot would be a climate change shock, and

0:17:40.320 --> 0:17:43.000
<v Speaker 2>I think it used to be a priority. It is

0:17:43.040 --> 0:17:45.520
<v Speaker 2>not anymore because geo politics and cyber and so on.

0:17:45.800 --> 0:17:48.119
<v Speaker 2>But I presume you're still looking at it and still

0:17:48.240 --> 0:17:51.280
<v Speaker 2>feeling that the banks and financial institutions can cope there's a.

0:17:51.280 --> 0:17:54.760
<v Speaker 3>Big climate shock, Yeah, definitely. And we also published a

0:17:54.800 --> 0:18:00.560
<v Speaker 3>refreshed approach to the climate climate risk impact on financials stability.

0:18:01.160 --> 0:18:04.719
<v Speaker 3>An interesting thing with that is that climate risk is

0:18:05.800 --> 0:18:07.800
<v Speaker 3>is not just a long term thing. There are also

0:18:08.040 --> 0:18:11.640
<v Speaker 3>shorter term issues and risk to financial stability coming from

0:18:11.760 --> 0:18:17.440
<v Speaker 3>climate either from flood example, which affect insurers and reinsurers

0:18:17.480 --> 0:18:20.879
<v Speaker 3>and also banks to the extent that homes that are

0:18:20.920 --> 0:18:24.119
<v Speaker 3>subject to flood risk are being the collateral for mortgages.

0:18:25.160 --> 0:18:30.800
<v Speaker 3>Another example is from climate transition risk, where some metals

0:18:31.760 --> 0:18:35.480
<v Speaker 3>are being more more needed for climate transition and there's

0:18:35.520 --> 0:18:38.800
<v Speaker 3>more pressure on those markets, on those commodities markets, and

0:18:38.880 --> 0:18:41.800
<v Speaker 3>we've seen over the last few years a few shocks

0:18:41.920 --> 0:18:46.040
<v Speaker 3>around around those markets, and those impact commodities trading, impact

0:18:46.080 --> 0:18:50.439
<v Speaker 3>the derivatives associated. So those are examples of shorter terms

0:18:50.720 --> 0:18:54.480
<v Speaker 3>financial stability is to climate, and it's important to keep

0:18:54.520 --> 0:18:57.640
<v Speaker 3>monitoring those things, and we'll be incorporating those things as

0:18:57.680 --> 0:18:59.919
<v Speaker 3>relevant into the stress test that we do in the future.

0:19:00.160 --> 0:19:01.920
<v Speaker 1>Now, I guess the difference is I remember, like ten

0:19:01.960 --> 0:19:04.159
<v Speaker 1>fifteen years ago, some of these stress tests, you know,

0:19:04.280 --> 0:19:06.639
<v Speaker 1>felt for me, like a young report at Bloomberg is

0:19:06.680 --> 0:19:10.200
<v Speaker 1>completely far fetched. It was like interest rates at ten percent,

0:19:10.240 --> 0:19:12.879
<v Speaker 1>at twelve percent. And now actually a lot of the

0:19:12.880 --> 0:19:17.600
<v Speaker 1>stress tests seemed to us quite plausible in worst case scenario.

0:19:17.920 --> 0:19:19.159
<v Speaker 1>How do you deal with the fact that some of

0:19:19.160 --> 0:19:23.240
<v Speaker 1>these stress tests could be actually, you know, real life

0:19:23.280 --> 0:19:26.760
<v Speaker 1>quite yeah, that could actually happen instead of being the

0:19:26.840 --> 0:19:28.240
<v Speaker 1>far fetched scenarios.

0:19:28.280 --> 0:19:32.440
<v Speaker 3>Well, I think we've always sought to, you know, use

0:19:32.480 --> 0:19:35.119
<v Speaker 3>scenarios for our stress tests that were severe but plausible.

0:19:35.400 --> 0:19:37.400
<v Speaker 3>And just to give you an example, we've just published

0:19:37.440 --> 0:19:39.439
<v Speaker 3>the result of our desk based stress test of the banks.

0:19:39.920 --> 0:19:44.880
<v Speaker 3>We've used two different scenarios mutually incompatible. They can't happen

0:19:44.880 --> 0:19:47.199
<v Speaker 3>at the same time. One is interest rate going up

0:19:47.200 --> 0:19:49.400
<v Speaker 3>by a lot, and the other one is interest rate

0:19:49.440 --> 0:19:51.840
<v Speaker 3>going down by a lot, And we're completely agnostic about

0:19:51.840 --> 0:19:54.159
<v Speaker 3>which one is more likely than the other one, which

0:19:54.240 --> 0:19:58.000
<v Speaker 3>just apply those two scenarios and see what happens. So

0:19:58.080 --> 0:20:00.439
<v Speaker 3>that is part of what we do to deal with

0:20:00.480 --> 0:20:03.679
<v Speaker 3>what you just said, is to be more exploratory in

0:20:03.720 --> 0:20:05.760
<v Speaker 3>our nature, so that we don't have to speculate on

0:20:05.840 --> 0:20:09.159
<v Speaker 3>what might happen. If it happens, what's the consequence.

0:20:09.880 --> 0:20:13.160
<v Speaker 1>Nott, Thank you so much for joining us. That was great,

0:20:13.400 --> 0:20:14.920
<v Speaker 1>really interesting, very well explained.

0:20:20.400 --> 0:20:22.960
<v Speaker 2>Thanks for listening to this bonus episode of In the

0:20:23.000 --> 0:20:26.480
<v Speaker 2>City from Bloomberg. It was hosted by me Alekri Stratton

0:20:26.600 --> 0:20:30.920
<v Speaker 2>and Francine Laqua. It was produced by Samasadi, production support

0:20:31.000 --> 0:20:34.720
<v Speaker 2>from Moses and Dam and sound designed by Blake Maples.

0:20:35.119 --> 0:20:39.199
<v Speaker 2>Brendan Francis Newnham is our executive producer. Sage Bauman is

0:20:39.280 --> 0:20:44.920
<v Speaker 2>Head of Podcasts Special thanks to Nathaniel Benjamin. Please subscribe, rate,

0:20:45.000 --> 0:20:47.399
<v Speaker 2>and review wherever you listen to podcasts.