The UK’s banks should boost their capital to help them withstand the expected global economic downturn, the Bank of England claims.
In the latest report by the Financial Stability Committee, the Bank reasserted its view that eurozone sovereign and banking risks are the “significant and immediate threat” to the health of the UK financial sector.
“UK banks have significant refinancing needs,” the report says. “While their direct exposures to the sovereign debt of the most vulnerable economies are limited, they have larger exposures to the private sectors of some weaker euro-area economies.
“They also have significant exposures to major European banking systems, which in turn are highly exposed to weaker euro-area countries.”
The committee says the UK banking sector has made “significant progress” in bolstering their capital and funding resilience since the height of the financial crisis. But it adds that progress has been set back by the strains in international bank funding markets.
Speaking at a press conference after the report’s publication, Mervyn King, the governor of the Bank, said banks should consider issuing new shares to raise capital if their earnings prove insufficient.
King also suggested banks could limit their dividends, while calling on the Financial Services Authority to encourage banks to shore up their balance sheets and disclose their leverage ratios as part of their regular reporting.