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UK banks 'at risk from financial woes in the eurozone' UK banks 'at risk from financial woes in the eurozone'
(40 minutes later)
The continuing financial problems in the eurozone pose a threat to UK banks, the Bank of England has warned.The continuing financial problems in the eurozone pose a threat to UK banks, the Bank of England has warned.
In its latest half-yearly Financial Stability Report, it calls for stringent new tests on the strength of European lenders. In its latest half-yearly Financial Stability Report, it called for stringent new tests on the strength of European lenders.
It also wants a comprehensive solution to the financial situation affecting the eurozone. It also called on banks to increase the capital they keep to absorb losses, by paying out less dividends and bonuses.
The Bank further said "overheating" in emerging markets, such as China and India, could eventually hit UK lenders. And the central bank expressed concern about the UK banks' exposure to a further downturn in the housing market.
The Bank's comments came after European Union leaders agreed to set up a permanent mechanism to bail out any member state whose large public deficits threaten the 16-nation eurozone. "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," it said in href="http://www.bankofengland.co.uk/publications/fsr/2010/fsr28.htm" >its latest Financial Stability Report.
Eurozone hair-raising
The Bank said it wanted a comprehensive solution to the financial situation affecting the eurozone.
Its comments came after European Union leaders agreed to set up a permanent mechanism to bail out any member state whose large public deficits threaten the 16-nation eurozone.
Creating such a eurozone stability mechanism will require a change to the EU's Lisbon Treaty - but the wording has now been agreed, diplomats say.Creating such a eurozone stability mechanism will require a change to the EU's Lisbon Treaty - but the wording has now been agreed, diplomats say.
The UK's Bank of England is concerned about the continuing debt situation in the eurozone - the 16 nations that share the euro - because British banks have substantial investments in many of those countries and specifically their banks. The Bank of England is concerned about the continuing debt situation in the eurozone - the 16 nations that share the euro - because UK banks have substantial investments in many of those countries and specifically their banks.
Regarding overheating in emerging markets, it points to stock markets in countries like India and Indonesia being at historically very high levels, and spiralling property prices in China. The UK central bank said that claims on the Irish Republic and Spain - the two biggest exposures - represented three-quarters of the total capital set aside by the entire UK banking system to absorb losses, and that this risk was concentrated in a few unnamed UK banks.
However, the banks' exposure to a default by a crisis-struck eurozone government is relatively limited.
Property prices
The Bank also voiced concern over the risk of a renewed downturn in the UK housing market.
"House price to rent ratios in several countries, in particular Ireland, Spain and the United Kingdom, remain well above historical averages," noted the bank.
Most indexes have shown house prices gradually declining since the summer.
In the UK, the Bank of England expressed concerns at the rising burden of unsecured debts - such as credit card debts and personal loans - and expressed concern that a future rise in the interest rates set by the Bank could push many borrowers over the edge.
The Bank also said "overheating" in emerging markets, such as China and India, could eventually hit UK lenders.
It pointed to stock markets in countries like India and Indonesia being at historically very high levels, and spiralling property prices in China.
The flow of money into these countries was helpful in its opinion, because the developing world represents better investment opportunities and many of the countries have undervalued currencies and large trade surpluses.
But the Bank was critical of some of its central banking counterparts in the emerging markets, saying that their interventions to neutralise the effect of these money inflows and keep their currencies weak was aggravating distortions in the capital markets.