UK financial system is least resilient of G7 countries

Structural reform is needed to ensure that UK does not fall behind competitors, says NEF report

The UK’s economic recovery may be on a fragile footing because its financial system is not sufficiently resilient.

A new report from the New Economics Foundation (NEF) claims that the UK’s financial system is the least resilient of all the G7 countries. This has worrying implications for the UK’s economic stability, the report authors say.

According to the NEF’s analysis, the UK economy has low levels of financial system resilience, significantly trailing other leading industrial economies, including Germany, Japan, France, Italy, Canada and the US.

And while the UK’s financial system resilience has improved slightly since the global financial crisis, it is worst placed in the G7 across five of the seven measured resilience indicators.

The seven key financial system resilience factors were as follows:

  • diversity;
  • interconnectedness and network structure;
  • financial system size;
  • asset composition;
  • liability composition;
  • complexity and transparency; and
  • leverage.

According to the latest available data (2012), the NEF Financial Resilience Index gives the UK a resilience rating of just 0.27, lagging behind the US (0.56), Canada (0.62), Italy (0.63), France (0.66), Japan (0.71) and Germany (0.73).

In a statement, the NEF said: “The UK’s financial system resilience took a nosedive in the early 2000s and, despite a small improvement since 2008, is still nowhere near bridging the gap with its nearest competitors.”

The report also included a number of specific policy measures that have the potential to improve financial resilience. These include separating retail from investment banking; promoting genuine bank diversity rather than simply more ‘lookalike’ challenger banks; and increasing peer-to-peer lending.

The report calls on regulatory bodies to adopt resilience indicators and assess the resilience of the financial system as a separate and distinct exercise from “stress testing” individual banks.

Tony Greenham, head of economy and finance at the NEF, said: “Without real structural reform, we remain extremely vulnerable to future financial storms. Decisions on banking policy, including the future of government-owned RBS, must be measured against the yardstick of financial system resilience if we are to be serious about protecting the economy from financial shocks.”

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