Greece crisis highlights fault lines in financial system, says report
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The speed with which Greece’s debt problems were transmitted to other countries and stockmarkets highlights “persisting fault lines” in the global financial system, according to the Bank of England.
In its Financial Stability Report published today, the bank says a lack of transparency about sovereign exposures amplified counterparty risk concerns, which then affected funding internationally.
While British banks have limited amounts of sovereign debt, the bank notes they have counterparty relationships with European banking systems that have larger exposures. According to the International Monetary Fund and the European Central Bank it is these European banks which face further writedowns this year.
Additionally the report notes that if undiminished “sovereign concerns could also affect UK banks through their impact on global financial markets”.
Overall the report notes that British banks strengthened their resilience throughout last year. It says capital increased significantly, with average rations now at their highest level for over a decade. Meanwhile, leverage fell sharply, which the report says reflects equity issuance and reductions in assets in about equal measure.
However, like their European peers, the report says UK banks “face significant challenges” in the period ahead. (article continues below)
The report states: “UK banks need to remain resilient in a difficult environment, while refinancing substantial sums of funding in coming years.
“They have a collective interest in providing sufficient lending to support economic recovery, and they will need over time to build larger buffers of capital and liquidity to meet more demanding future regulatory requirements.”
Meanwhile, renewed concerns regarding counterparty risk could reduce the availability of bank funding, while deteriorating investors sentiment could also trigger asset price falls, says the report.
