Counterparty Due-Diligence Assessment Monthly Summary

The consensus view of the latest monthly Reuters poll of economists predicts that the Bank of England (BoE) will hold borrowing costs at 3.75% this year although over a third expect at least one ​rate hike as the Iran war fuels an energy price surge that drove up inflation forecasts. The May poll’s steady outlook comes even as UK inflation jumped to 3.3% in March and ‌is ⁠expected to peak at 3.6% in the fourth quarter – almost double the central bank’s 2.0% target. Nearly 40% of economists surveyed expected at least one rate hike by end-2026, up from 23% in the April poll, and a sharp shift from earlier this year when nearly all said the next move would be lower. Weak growth forecasts were largely left unchanged with the UK economy expected to grow 0.8% this year and 1.2% next year.

The UK ​Government will impose tougher rules later this year on money market funds ‌which have been a focus of regulators since market turmoil in March 2020 when they were hit by heavy redemptions during a COVID-19-induced “dash for cash”. Legislation will establish a new regulatory ​framework with the expectation that the £300 billion sterling ​money market fund sector will hold more liquid assets. In its latest Financial Stability Report, the BoE ​said money market funds are vulnerable in periods of stress because investors can withdraw cash faster ‌than ⁠some of the funds’ less liquid assets can be sold, leaving them exposed to sudden waves of redemptions. It warned that this could trigger runs that amplify market shocks and ultimately tighten financial conditions for the wider UK economy.

The Financial Conduct Authority (FCA) has said a tribunal hearing on ‌legal challenges to its compensation scheme for mis-sold car loans is unlikely before October and has told lenders to prepare for the possibility that the scheme could be scrapped entirely. Mercedes-Benz and Volkswagen are among four groups (including a ​consumer group) to have challenged the £9.1 billion scheme imposed by ​the FCA on the UK motor finance industry for the ⁠mis-selling.

The UK Government has set out changes ‌to rules that require banks to ring-fence their retail arms that it said would create a more agile and proportionate regime, though it stopped short of a major overhaul. The UK Treasury estimates that the changes would allow banks to provide up to ⁠£80 billion in additional lending to businesses and give the Financial Conduct Authority (FCA)  – the prudential arm of the Bank of England – more ​powers to amend the regime in future. However, the regime’s core protections are left unchanged. The UK rules are among the world’s ​most stringent and apply to banks with at least £35 billion in retail deposits.

Fitch has updated its Bank Rating Criteria which has resulted in the most significant changes to its long‑term Issuer Default Ratings (IDRs) in a decade. The core shift is that IDRs now reflect the strength of the operating bank rather than the resolution stack. As such, the methodology gives much more rating uplift to senior creditors and depositors in strong resolution regimes. As a result, up to 20% of long‑term IDRs globally are likely to be upgraded. In summary, deposits can now be rated above senior unsecured debt when: the jurisdiction has statutory depositor preference; or the relevant bank has a resolution buffer >10% of RWAs even without depositor preference. Fitch will also begin assigning new deposit ratings to reflect this differentiation. Banks and banking groups that have been upgraded include:

During the month S&P raised the outlooks for HSBC Holdings plc and other rated Group entities to “Positive” to reflect expectations that the credit profile of the Group will remain robust and resilient to potential economic and trade fragmentation underpinned by robust earnings and strong capital, funding, and liquidity metrics despite geopolitical tensions, particularly between the U.S. and China.