The Bank of England (BoE) has warned in its latest half-yearly reports that British banks are exposed to the financial turmoil in the EU zone and should undertake vigorous stress tests to ensure they can survive a loss shock.
It advised banks to increase their capital base by lowering executive bonus pay-outs and paying out lesser dividends on profits. The central bank also sounded caution about the deteriorating home prices and the British banks’ exposure.
“It is in banks’ collective interest to build resilience gradually through retention of earnings, which would be boosted if banks restrain distribution of profits to equity holders and staff”, the BoE report stressed.
The UK banks need to refinance £500 billion worth debts in the next two years, out of which £200 billion are loan assistances provided by BoE and the UK Treasury as emergency rescue funds.
Ruling out any quick-fix solution for the Eurozone problem, the bank said long term measures are required to deal with the problem. The bank made the observation after Eurozone’s announcement of setting up an emergency rescue fund for long-term crisis management of its member countries.
The central bank is worried about the crisis in the EU since British banks hold substantial sovereign debts of the crisis hit countries, indirectly. UK banks have exposure in the Irish Republic and Spain; actually provisions for these two economies represented three quarters (75%) of all capital set aside by British banks for possible default losses. Apparently this risk is concentrated to a few UK banks which the BoE refused to name.
It also understood that UK banks have exposure to other EU banks as well. It’s very much possible that a banking crisis will have a domino effect on the entire EU-UK banking system.
Commenting over the recent fall in home prices, ‘House price to rent ratios in several countries, in particular Ireland, Spain and the United Kingdom, remain well above historical averages’, it cautioned.