Eurozone crisis is biggest threat to UK stability: BoE

24th June 2011, Comments 0 comments

The eurozone debt crisis represents the biggest threat to Britain's financial stability, the Bank of England's new watchdog warned on Friday.

"Sovereign and banking sector strains in some peripheral euro-area economies are the most material and immediate threat to UK financial stability," said the minutes from the first meeting of the BoE's Financial Policy Committee (FPC).

It added: "Market concerns remain over fiscal positions in a number of euro-area countries and the potential for contagion to banking systems.

"Any associated funding disruption to bank funding markets could spill over to UK banks."

BoE governor Mervyn King, who chairs the committee, told reporters that the crisis was "the most serious and immediate risk".

The FPC, set up to oversee financial stability in the wake of the credit crunch and global financial crisis, recommended that banks retain more of their profits earned during the good times in order to weather adverse shocks.

Members discussed potential measures to cap shareholder dividends, or to pay the dividends in shares rather than cash.

Banks needed to clarify how much they have loaned to individual countries, such as Greece, to increase transparency about exposure.

And the FPC warned that banks may have made inadequate provisions for bad debts, with many businesses and homeowners struggling to keep up repayments on loans and mortgages.

The committee also urged closer monitoring of risks from complicated and opaque investment structures like exchange-traded funds.

"We cannot hope to prevent financial crises from happening. But we can build institutions that help to ensure that our financial system is more resilient in future," King added.

Although the UK banking sector has limited exposure to debt-ridden nations like Greece, the impact on Germany, France and other countries would have a knock-on effect, according to the committee.

"There is a risk that a sharp deterioration in vulnerable European economies may have adverse implications for credit conditions in larger European economies which are more heavily exposed, such as France and Germany," the minutes read.

"In conditions of severe stress in the euro area this could increase the risk of losses to UK banks."

The FPC, which held its inaugural meeting on June 16, includes senior BoE officials and external members.

The Bank of England is due to take over responsibilities from the Financial Services Authority (FSA) for ensuring Britain's financial stability in 2013.

© 2011 AFP

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