Governor of the Bank of England Andrew Bailey (PA)
(Picture: PA Wire)The Bank of England (BoE) is to test the ability of the UK financial sector to withstand deep recessions in the “UK and global economy” later this year as part of its regular stress tests sounding an ominous note for Britain.
It said that banks must increase the amount of money they set aside to absorb shocks to head off further economic dives.
Starting a year from now, banks will be required to set aside a sum equal to 2% of their assets as a buffer, as opposed to the normal 1%.
Hammering another nail into the coffin today, with the release of its Financial Stability Report (FSR) for July, the Bank said it expects households and businesses to become “more stretched” over coming months.
“Since the last FSR, which we published in December last year, the global economic outlook has deteriorated markedly. Global financial conditions as a whole have tightened significantly,” Andrew Bailey the Governor of the BoE told a news conference earlier today.
Flagging the cost of living crisis, the report stated that “global economic conditions have worsened” and that this has put “pressure on the finances of households and businesses”.
The Bank said that the economic outlook for the UK and across the globe has “deteriorated materially” and that like several other financial authorities around the world it has “increased interest rates to help slow down price increases” as markets have been volatile and financing conditions have tightened.
“These higher prices, weaker growth and tighter financing conditions will make it harder for households and businesses to repay or refinance debt,” the BoE said.
The institution did, however, back the stability of the banking sector and said it had levels of capital and liquidity that can support households and businesses even with the worsening in the economic outlook, but admitted deeper stress tests would have to be run.
The BoE said that developments related to the Russian invasion of Ukraine will be key factor that will affect both the global and UK outlooks, “particularly if energy and food prices rise further”.
Stronger or more persistent inflationary pressures than currently expected might lead to: weaker economic growth globally; a further sharp tightening in global financial conditions; and the potential for further volatility and stress in financial markets, the Bank said.
And risks remain in China around the re-emergence of vulnerabilities in the property sector and potential restrictions to contain further Covid outbreaks, according to the report.
