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Bank of England warned on Tuesday that the economic outlook for the UK and the world has worsened since the start of the year and advised banks to boost capital buffers so they can weather the storm.
International bodies such as the International Monetary Fund and the OECD say the UK is more prone to recession and persistently high inflation than other Western countries that are grappling with global turmoil in energy and commodity markets.
“The global economic outlook has deteriorated markedly. Global financial conditions have generally tightened significantly,” Bank of England Governor Andrew Bailey said at a press conference after the Bank of England released its semi-annual financial stability report.
The Bank of England added that developments around the war in Ukraine will also be of key importance.
British banks The central bank said they are well positioned to weather even a severe economic downturn, although their capital adequacy ratios, while still high, are expected to ease slightly in the coming quarters.
Members of the Financial Policy Committee have confirmed that the Bank of England will double the counter-cyclical capital buffer rate to 2% of risk-weighted assets next July and said it could move the rate in either direction depending on how the global economy develops. .
The rate provides an additional buffer for banks such as HSBC, Barclays, Lloyds Banking Group and NatWest, which varies depending on the economic outlook.
The increase in the buffer to 2% means banks will need an additional £11bn ($13.2bn) of capital, the Bank of England said.
The Bank of England said banks are resilient to household and business debt vulnerabilities despite a worsening cost-of-living crisis and inflation approaching double digits.
The central bank also expressed concern about state of the main financial markets — such as US and UK government bonds — that were the subject of a March 2020 “cash roll” when the COVID-19 pandemic triggered panic selling.
“Amid high volatility, liquidity conditions have deteriorated even in normally highly liquid markets such as US Treasury bonds, securities and interest rate futures,” the Bank of England said.
It says major UK markets, while still functioning, have become more expensive to trade and bid-ask spreads on short-term securities have more than doubled from the 2021 average.
“(Conditions) could continue to worsen, especially if market volatility further increases,” the Bank of England said.
The central bank also said it would conduct an in-depth analysis of the functioning of the commodities market as metals trading was severely disrupted in March due to Russia’s invasion of Ukraine.
The central bank said it would start stress testing banks in 2022, delayed due to the war, in September, with results likely to come in mid-2023.