BoE warns banks of risk of sharp global interest rate rise
By Huw Jones and David Milliken
LONDON (Reuters) - The Bank of England warned banks and borrowers on Wednesday about risks from a potential abrupt rise in global interest rates, and said banks might need to further bolster their capital cushions to protect against this.
The past week has seen a sharp rise in global bond yields since U.S. Federal Reserve Chairman Ben Bernanke said that the U.S. central bank may scale back bond purchases later this year.
BoE Governor Mervyn King said on Tuesday that markets had "jumped the gun" in their sharp reaction to Bernanke's comments, but the BoE's half-yearly Financial Stability Report said more bond yield rises could hurt UK banks, insurers and borrowers.
The BoE said that it had ordered an investigation into the vulnerability of Britain's financial institutions and borrowers to higher interest rates, to report back by September to its new risk watchdog, the Financial Policy Committee.
"Financial institutions and markets are also vulnerable to an abrupt rise in global interest rates. And some UK borrowers remain highly indebted, which could result in losses for UK banks," the FPC said.
The 11-member FPC gained legal powers to set capital requirements for banks in April after operating on an interim basis for the previous two years, and just a week ago it ordered five banks to raise 13 billion pounds ($20 billion) of extra capital.
Privately bankers complain that higher capital requirements and limits on leverage are hampering their ability to lend, but this is strongly disputed by the BoE, which says healthier long-term capital levels make it cheaper for banks to borrow.
Wednesday also saw the BoE allow banks to scale back some of the short-term cash they hold against shocks to encourage more lending to the economy. Continued...