The UK’s major banks are “resilient” in the face of global turmoil, but households and business still face the risk of higher borrowing costs as a result, according to the Bank of England.
The central bank’s Financial Policy Committee (FPC) added that there is an “urgent need” to bolster market-based finance, such as some hedge funds, amid market volatility.
It came as the Bank said that UK households remain “squeezed” by higher living costs and mortgage payments.
However, it said more households are expected to be well positioned to pay off debts than was expected in December 2022 due to cooling energy prices and an improved UK employment outlook.
It comes after the Bank last week hiked interest rates for the 11th time in a row to 4.25% and Governor Andrew Bailey said he is more optimistic that the UK can avoid recession.
Nevertheless, the latest report from the FPC comes amid a volatile banking backdrop.
Earlier this month, US tech-focused lender Silicon Valley Bank collapsed, leading to the sale of its UK operation of HSBC for a pound, while smaller rival Signature bank also failed.
In Europe, Credit Suisse was also sold in an emergency £2.65 billion deal to rival UBS after long-standing financing issues.
The FPC stressed that UK banks have seen their profitability increase recently, amid higher interest income due to rates increases, and “are not exposed to material direct losses” related to Silicon Valley Bank or Credit Suisse.
“The UK banking system therefore has the capacity to support the economy in a period of higher interest rates even if economic conditions are worse than expected,” the report said.
However, it added that there are still channels through which UK economic conditions could be affected by recent global banking issues.
The report said: “These include any lasting impact on bank funding costs, which increased moderate following recent events, and the potential for that to raise the cost and reduce the availability of borrowing for UK households and businesses.”
Tighter financial conditions are also continuing to weigh on the ability of households, business and governments to pay off their debts, it added.
On Wednesday, the Bank also told pension regulators to act “as soon as possible” to mitigate the risks from liability-driven investment (LDI) pensions, which contributed shockwaves in the pensions market following Liz Truss’s chaotic September “mini-Budget”.
