Liquidity storm could throw UK into chaos

The Bank of England has warned that global liquidity and the threat of Greek default could throw the UK economy into chaos.

The FPC (Financial Planning Committee), which is tasked with maintaining financial stability at thhe Bank Of England said that liquidity - the degree to which assets can easily be traded - may have become "more fragile" in some markets around the world.

Mark Carney, governor of the Bank Of England said they would be working with the Financial Conduct Authority to assess whether asset managers could cope with a fast paced change in market conditions.

"The Committee remains concerned that investment allocations and pricing of some securities may presume that asset sales can be performed in an environment of continuous market liquidity, although liquidity in some markets may have become more fragile," the FPC said this week.

"Trading volumes in fixed income markets have fallen relative to market size and recent events in financial markets, including in US Treasury markets in October 2014, appear to suggest that sudden changes in market conditions can occur in response to modest news. This could lead to heightened volatility and undermine financial stability."

Although the FPC has highlighted the risk that liquidity poses to the UK, members said the Bank Of England would work with market participants to ensure that they were aware of the risks and price liquidity appropriately in an attempt to mitigate negative effects.

Just last month Mr. Carney warned that diverging monetary policies across North America, the UK, Europe and and Asia may cause further turbulence and "test capital flows across the global economy, including emerging markets."

The FPC was also quite clear that the situation in Greece posed a real threat to the UK, "There also remain significant risks in relation to Greece and its financing needs, including in the near term."

"Any of these risks could trigger abrupt shifts in global risk appetite that in turn might lead to a sudden reappraisal of underlying vulnerabilities in highly indebted economies, or sharp adjustments in financial markets."

Writing to George Osbourne, Mr. Carney said that the risk to financial stability remained "elevated" and added that he would review UK bank capital rules that might result in lenders having to raise their buffers.

The Bank Of England will ask asset managers about their strategies for managing liquidity of their funds. "This would inform assessment of the extent to which markets are reliant on investment funds offering redemptions at short notice," the FPC said.