Financial Risk Outlook 2008

This year’s Financial Risk Outlook is focused on the risks arising from the events of the second half of 2007 and the less benign economic outlook that we expect over the next 18 months. The tighter financial conditions have led to the emergence of new risks and also highlighted some aspects of Priority Risks covered in the previous editions of the Financial Risk Outlook.onsensus forecasts, on which our Central economic scenario is based, indicate a less benign economic outlook for the UK and global economies than we have experienced in recent years. The risks to this central case have increased considerably in the year since we published the previous edition of the Financial Risk Outlook, and the distribution of these risks is weighted heavily to the downside.

Financial market conditions deteriorated considerably in 2007 as investors reassessed risks in their portfolios and risk premia began to rise. As a result, financial markets could be more vulnerable to external shocks and the impact of shocks on firms could be bigger than it was in previous years. The operating environment for firms remains difficult and it is likely that these conditions will persist, particularly if investor confidence in some markets and financial institutions remains low.

The recent tightening in financial conditions may have exposed some firms’ business models as being potentially unsuitable in more stressed financial conditions where, for example, access to liquidity is restricted. This has put pressure on measures of prudential risk for some firms, such as capital and liquidity.

The restricted availability of certain funding sources could force some lenders to shrink their mortgage businesses, which would have direct consequences for the real economy and consumers. The lower supply of secured credit and tighter lending standards for mortgages are likely to add further pressure on already highly-indebted consumers. We therefore expect to see a growing number of consumers experiencing debt-repayment problems in 2008.

Despite the more difficult economic and financial conditions, firms must not divert attention away from focusing on conduct-of-business requirements and our high-level principles. In particular, firms will need to ensure they treat customers fairly, continue to tackle market abuse and other areas of financial crime, and address other conduct-ofbusiness requirements.

We will continue to focus on other longerterm risks not discussed at length in this document. These include longevity, the future for the retail distribution of financial products, conduct-of-business issues, and climate change, which remain important to us and should also remain important to firms. More info : www.fsa.gov.uk