Bank Of England Warns Brexit Remains 'material Risk' To Financial System

The FPC said in its meeting on 12 March that both UK and EU politicians need to "tackle these [market] risks" as a priority.

"Brexit could disrupt the financial system directly," the FPC said. "The combination of a disorderly Brexit and a severe global recession and stressed misconduct costs could result in more severe conditions than in the stress test."

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Despite the warning, the FPC did say Brexit risks were yet to warrant additional capital buffers for the banking system.

"The FPC continues to judge that, apart from those related to Brexit, domestic risks remain standard overall, and that risks from global vulnerabilities remain material."

Global outlook

Elsewhere, despite the outlook for global growth improving further since November last year, the BoE warned interest rate volatility was also a "material risk" for bond markets in particular.

In his first semi-annual monetary policy testimony since taking over from Janet Yellen earlier this year, new Federal Reserve Chairman Jerome Powell's signalled the central bank could hike rates more than the anticipated three times this year in an attempt to contain inflation.

This more hawkish outlook caused US 10-year Treasuries to widen and equity markets to fall with the market now pricing in a 30% chance of four hikes this year.

The BoE said: "Across major markets, spreads between corporate and sovereign bond yields remain compressed, particularly for high-yield corporate bonds.  

"Against that market backdrop, risks stemming from corporate debt in the US have continued to build."