UK banks are also making a higher proportion of loans to other financial institutions than to the rest of the economy – the bulk of the loans go to issuers of mortgage-backed securities (MBS) and private equity houses. High degrees of leverage mean a small disturbance could be amplified very easily and rapidly, the report said.
The existence of the risk amplifiers mean a relatively small shock could trigger a credit downturn, and that the impact would be faster and more widespread. While banks carry high levels of regulatory capital, MBS issuers could be in danger, with little of the risk currently priced in, Clear Capital said.
The week on Risk.net, July 7-13, 2018Receive this by email