The effects of the war highlight the “fragility” of the financial system, says the UK’s top central banker – POLITICO

LONDON – Russia’s attack on Ukraine is putting additional strain on the global financial system, which is already facing heightened risks from so-called shadow banking, cryptocurrency, cloud use and cyber defenses, according to Bank of England’s Jon Cunliffe.

At the same time, the war has rattled commodity markets from gas to oil and metals to food, sending shockwaves through the financial system and sending consumer prices skyrocketing, said Cunliffe, who serves as the Bank’s deputy governor for financial stability.

The bank still sees the chance that banks will have to increase capital requirements as slim, he told POLITICO in his Threadneedle Street office. But for “banks involved in commodities and trading commodities, the risks will have changed at the moment due to sanctions,” he noted.

Still, he pointed out that volatility in global financial markets was already building before the war due to rising inflation and monetary tightening – issues the bank detailed in its latest Financial Stability Report in December.

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

The imposition of sanctions on Russia and subsequent skyrocketing commodity prices have only added to the existing uncertainty, Cunliffe said.

“We have seen higher inflation [the pandemic]. We see the prospect of higher interest rates. And the market adapted to that around the core markets. And it’s still going on,” he said. “But how that’s complicated by the Ukraine overlay is quite complex.”

Cunliffe pointed to a web of risks linking the weak links in global unbanked finance that spilled over in 2020 as a “cash attack” threatened to melt down international bond markets and forced central banks to invest billions in new money . That could be much more difficult now that inflation in Europe, the US and the UK is at multi-decade highs, he said.

“You have a lot of different things that are moving the financial markets now, and it’s a bit awkward to still have those fragilities,” he said. “I don’t know what the triggers could be because I don’t know how the Ukraine crisis will develop.”

He also cited cryptocurrency markets suffering from “lack of transparency” and increased activity since the war began. Still, the “off-ramps” where digital assets are converted into government-backed currencies are “not huge,” he noted, so they cannot be used to circumvent sanctions “on a large scale.”

Similarly, threats of Russian cyberwar against Ukraine’s western partners have highlighted existing fault lines in digital banking and commerce and brought into focus how IT service providers protect banks and their customers from attacks. “When [providers] In order to offer these services to the financial sector, we need certainty about the standards,” he said. “We need certainty that they have been tested. There is a need for penetration testing.”

Trip to Brussels

Cunliffe, a capital markets specialist who has worked with international bodies such as the EU and the International Monetary Fund throughout his career, also played a key role in the scramble for sanctions against the Kremlin when he acted as adviser to the UK government in the G7 talks . A veteran government official and central banker, he said he considers working in the public sector “a bit of a privilege”.

And in news that caught the attention of the EU bubble, Cunliffe accompanied his boss Andrew Bailey on a visit to Brussels last week. But to date, neither Cunliffe nor the bank have shared many details about the purpose of the visit.

“A lot of it was about Ukraine and the impact of sanctions and the economic situation that we’re seeing,” he said. He was quick to add that the trip “did not deal with” outstanding Brexit issues, such as the absence of equivalence resolutions for the UK financial industry or a memorandum of understanding on fiscal cooperation, which the Commission refrained from adopting for more than a year.

“It was basically just talking to people about what they think,” he said. “There was good cooperation in responding to Russian aggression in Ukraine. But the other issues we talked about are separate from that.”

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

“The war in Ukraine has highlighted geopolitics and risks on the European continent,” he said.