BoE monitors banks' capital buffers against looming risks

The Bank of England's financial policy committee has raised concerns about the adequacy of banks' protection against losses as risks loom in the economy.

The FPC left its countercyclical capital buffer, designed to strengthen banks when times are good, at 1%. But the minutes showed members of the committee raising concerns about the strength of banks' balance sheets, including risks to corporate loans and looser mortgage lending standards.

Squeezed net interest margins could hamper banks' ability to generate income to offset higher bad debts, the FPC said. Some members also thought increased global risks could make the 1% buffer less effective in protecting banks. The FPC, whose job is to protect financial stability, also said its standard one-year lag in increasing the buffer could leave it trying to catch up with events.

"Acting in the event only of a marked evolution in risks could result in a need to consider larger adjustments to the UK CCyB [countercyclical buffer] rate, which could have greater potential economic costs than a more gradual approach," the minutes said.

The FPC said that although the current risk environment was standard it was prepared to strengthen the buffer beyond 1% if extra risks developed.

The committee also said Britain had become more vulnerable to foreign investor sentiment after overseas inflows into UK banks reached their highest since the financial crisis.

Between 2012 and 2015, foreign investors sold UK assets and British investors sold more overseas assets but since the start of 2016 UK residents had become net buyers of foreign assets and foreign inflows had been "substantial", minutes of the FPC's June meeting said.

The share of UK capital inflows vulnerable to refinancing risk has also risen, including banks' wholesale deposits, the BoE said. The freezing of wholesale deposits was one of the first signs of the financial crisis in 2017.

The FPC said risks were balanced by short-term foreign liabilities of £270bn being covered by £330bn of liquid foreign currency assets. Unlike before the financial crisis, UK banks are net lenders to the rest of the world.

"Annual foreign inflows into the UK banking sector in the form of loans and deposits in 2017 were at their highest level since the global financial crisis,” the FPC minutes said. “The recent pattern of cross-border flows made the UK more vulnerable to a reduction in foreign investor appetite for UK assets, which could lead to a tightening in credit conditions for UK households and businesses."

Inflows into commercial real estate and leveraged loans stood out, the FPC said.