BoE: Warns banks to prepare for financial storm

The Bank of England has warned that the economic outlook for Britain and the world has worsened since the start of the year and told banks to boost their capital reserves to ensure they can weather the storm.

International organizations such as the IMF and OECD say Britain is more prone to recession and persistently high inflation than other Western economies, which are struggling to cope with energy and commodity crises.

“The global economic outlook has worsened significantly. Financial conditions globally have tightened significantly,” central bank governor Andrew Bailey said at a press conference, releasing the semi-annual financial stability report.

Developments around the war in Ukraine will also be key, the BoE added.

British banks were well placed to weather even a severe economic downturn, the central bank said, although it stressed that their capital ratios, while still strong, were expected to ease slightly in the coming quarters.

Members of the financial policy committee confirmed that the BoE will double the capital buffer rate to 2% of weighted assets in July next year, and stressed that it could vary the rate in either direction depending on how the global economy develops .

The rate represents an extra cushion of protection for banks such as HSBC, Barclays, Lloyds, NatWest, which fluctuates depending on the economic outlook.

Increasing the cushion to 2% means banks will need 11 billion pounds ($13.2 billion) of extra capital, the BoE said.

Despite the worsening cost of living, with inflation heading into double digits, the BoE stressed that banks were resilient to debt vulnerabilities among households and businesses.

The central bank also expressed concern about the health of key financial markets, such as US and government bonds, which took center stage in March 2020 when the pandemic triggered panic selling.