The Bank of England calls for more stringent tests over fears for UK banks from the eurozone crisis.
Unstable conditions in the eurozone could cause risks for UK banks warns the Bank of England .
The Bank of England has warned that the unstable condition of the eurozone could pose a threat to UK banks. Following economic downturns in Greece, Ireland and more recently Korea, the central bank are calling for more stringent tests to be imposed on European lenders and a new solution to the eurozone financial situation.
In its latest Financial Stability Report, it also called on banks to increase the capital they keep to absorb losses and encouraged banks to pay less out on dividends and bonuses.
The bank’s comments come after European leaders agreed to set up a new mechanism earlier this month that bails out any member state whose large public deficits could threaten the 16-nation eurozone. The bank are concerned that UK banks could be hit hard by the new solution because they have substantial investments in many of the 16 member states.
There are also concerns that the exposure of UK banks to other eurozone banks could raise the risk of the UK getting involved in any general eurozone banking crisis.
In another part of its Financial Stability Report, the Bank of England also voiced concerns regarding the exposure of UK banks to another downturn in the country’s housing market.
“House price to rent ratios in several countries, in particular Ireland, Spain and the United Kingdom, remain well above historical averages,” the bank said in the report.
Other areas of concern highlighted in the report include company debt (in particular in the commercial property market) and the rising risks of unsecured debts.