• BoE, in its half-yearly report, told banks to double capital buffer rate to 2%
• Conditions could continue to deteriorate if market volatility increases further, report mentions
The Bank of England (Boe) on Tuesday warned the economic prospects for Britain, and the world had been murky since early 2022 and told banks to increase capital buffers to brace for the storm.
“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 UK’s central bank published its half-yearly Financial Stability Report (FSR).
International Monetary Fund (IMF) and Organisation for Economic Co-operation and Development (OECD) earlier said the UK is more susceptible to recession and persistently high inflation than other Western economies.
The central bank said that British banks were well-placed to weather even a severe economic downturn. However, it also noted their capital ratios were expected to weaken slightly in the coming quarters.
The Financial Policy Committee has confirmed that the BoE will double the counter-cyclical capital buffer rate to 2% of risk-weighted assets in July next year and said the rate could vary in either direction depending on how the global economy pans out.
Increasing the buffer to 2% means banks will need an additional 11 billion pounds ($13.2 billion) of capital, the central bank said in the report.
With inflation heading towards double digits, the BoE said banks were resilient to debt vulnerabilities among households and businesses.
The central bank has also expressed worries over the health of core financial markets - such as US and British government bonds.
“Amid high volatility, liquidity conditions deteriorated even in usually highly liquid markets such as US Treasuries, gilts and interest rate futures,” the BoE said.
It said core British markets - while still functional - had become more expensive to trade, with bid-ask spreads on short-dated gilts more than doubling compared with their 2021 average.
“(Conditions) could continue to deteriorate, especially if market volatility increases further,” the BoE said.
Picture Credit: Business Insider
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