Bank of England warns of eurozone debt crisis dangers

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The Bank of England warned Friday the eurozone debt crisis posed a risk to Britain's financial system and urged its banks to build up their reserves.

In its Financial Stability Report, the bank praised the 750-billion-euro (one-trillion-dollar) EU-IMF stabilisation fund put together last month to prop up the euro after markets took fright at Greece's debt problems.

But it warned of continuing "market pressures" which could affect Britain's financial system.

"The IMF and European authorities put in place a substantial package of support," it noted.

"While these measures helped to stabilise conditions, market pressures have not yet abated."

Despite Britain not being a member of the 16-nation eurozone, the BoE said the exposure of the country's financial system to institutions caught up in the currency crisis was a major danger.

It noted there was a risk to Britain's financial institutions when dealing with "European banks that have direct exposures to countries facing increased sovereign risks".

The report, which the bank publishes twice a year, also expressed fears over investors retreating from risk in the wake of the crisis which could endanger banks' ability to renew billions of pounds in existing funding.

The BoE welcomed banks' efforts to increase their capital, which it said had "helped them weather recent tensions".

But it warned of "a number of challenges in the period ahead", which included increasing lending to help Britain secure its recovery from a record recession and building up bigger reserves in line with expected new regulatory demands.

Britain's banks "have a collective interest in providing sufficient lending to support economic recovery", said the report.

"They will need over time to build larger buffers of capital and liquidity to meet more demanding future regulatory requirements."

A tougher new regulatory regime for banks will be agreed later in the year.

© 2010 AFP

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