The Bank of England cautioned on Tuesday that the economic outlook for the UK and the rest of the globe had deteriorated since the beginning of the year, and advised banks to increase capital buffers to guarantee they could weather the storm.
According to international organisations such as the International Monetary Fund and the Organization for Economic Cooperation and Development, Britain is more vulnerable to recession and chronically high inflation than other Western nations dealing with global energy and commodities market shocks.
“The global economic outlook has deteriorated markedly. Global financial conditions as a whole have tightened significantly,” Bank of England Governor Andrew Bailey told a news conference after the BoE published its half-yearly Financial Stability Report (FSR).
The BoE also said that developments in Ukraine’s conflict will be critical.
The central bank said British banks were well-positioned to survive even a severe economic downturn, while capital ratios, although still solid, were anticipated to fall modestly in the coming quarters.
Members of the Financial Policy Committee acknowledged that the Bank of England would increase the counter-cyclical capital buffer rate to 2% of risk weighted assets in July next year, and that the rate might change in either direction depending on how the global economy performs.
The rate serves as an additional cushion for banks such as HSBC (HSBA.L), Barclays (BARC.L), Lloyds Banking Group (LLOY.L), and NatWest (NWG.L), and it changes according to the economic forecast.
Increasing the cushion to 2% means banks would need an extra 11 billion pounds ($13.2 billion) in capital, according to the BoE.
Despite a rising cost-of-living squeeze, with inflation approaching double digits, the Bank of England said that banks were robust to debt vulnerabilities among families and companies.
The central bank also voiced concern about the soundness of key financial markets, such as US and UK government bonds, which were the target of the March 2020 “dash for cash” as a result of the COVID-19 pandemic-induced panic selling.
“Amid high volatility, liquidity conditions deteriorated even in usually highly liquid markets such as U.S. Treasuries, gilts and interest rate futures,” the BoE stated.
It said that, although key British markets remained operational, they had become more costly to trade, with bid-ask spreads on short-dated gilts more than tripling compared to their 2021 average.
“(Conditions) could continue to deteriorate, especially if market volatility increases further,” the BoE said.
The central bank also said that it will undertake an in-depth review of the commodities market’s functioning, after the metals trade was badly interrupted in March by Russia’s invasion of Ukraine. more info
The central bank said that its 2022 stress test of banks, which had been postponed owing to the conflict, would begin in September, with findings expected in mid-2023.