Tuesday, 26 July 2016

Risks to U.S. Financial Stability Increase After Brexit

In World Economy News 26/07/2016

Threats to America’s financial stability rose after the U.K. voted in June to leave the European Union but remain moderate, according to a U.S. report.
The U.K. decision to split from the 28-member bloc “surprised financial markets and was a negative shock to investor confidence,” said Richard Berner, director of the Office of Financial Research, the research arm of the Financial Stability Oversight Council. He said the vote ushers in “months or years of uncertainty” over rules tied to the U.K.’s investment, financing and trade relations with Europe and the rest of the world.
Despite the ability of U.S. markets to recover from the initial shock of a market selloff, persistent concerns remain as the U.K. decides “if, how and when” to leave the EU, Mr. Berner said in a briefing with reporters. Possible spillover effects, he said, could jolt the broader financial system, including U.S. banks and nonbanks such as life insurers and broker-dealers.
“Larger shocks to confidence are possible as those deliberations and negotiations play out,” Mr. Berner said. The Office of Financial Research’s midyear report updates risks to financial stability from December 2015.
The report finds that damage to investor confidence globally as well as indirect effects, as past episodes of financial instability have shown, can “evolve in less-predictable ways,” which often can be “self-perpetuating and indirect linkages can be invisible until revealed by stress.”
In the U.S., the effects of the U.K. vote could include slower economic growth as consumers and businesses postpone spending and investment, and it may lead the Federal Reserve to keep long-term U.S. interest rates low, the report says.
“The U.K. vote has pushed European rates even lower and is likely to prolong negative interest rates policies in the euro area and elsewhere, ” according to the report. “These factors could keep U.S. long-term rates low for years.”
Since Brexit, Federal Reserve officials are looking more confidently toward an interest-rate increase before the end of the year, possibly as soon as September, now that financial markets have stabilized.
Last week, European Central Bank President Mario Draghi stopped short of pledging fresh stimulus for the eurozone economy and agreed to leave interest rates unchanged for now, saying it was too early to determine the economic fallout of the U.K. referendum.

Source: Dow Jones