The warning on Tuesday, contained in the BoE’s quarterly financial stability update, comes as the UK faces the highest inflation rates in 40 years, heightening concerns that households and businesses will struggle to pay their debts. “Since the last financial stability report, the global economic outlook has deteriorated significantly,” said Andrew Bailey, governor of the BoE. “Developments in the Russian invasion of Ukraine have been a key factor influencing the global outlook.” The BoE also noted the recent turmoil in global markets and warned that “risky asset prices remain vulnerable to further sharp adjustments” amid additional supply shocks, faster-than-expected global interest rate rises and slower-than-expected economic growth. UK banks’ capital ratios – essentially a measure of the war capital from which they can make loans and absorb losses – have already started to fall “in line with expectations” and there were “indicative signs” that banks are “reducing risk-taking at the margins,” the central bank said. It also noted that financial institutions had “significant capacity” to continue lending, even in a deteriorating environment. “Restricting borrowing solely to defend capital ratios or capital buffers would be counterproductive and could prevent creditworthy firms and households from accessing funding,” the BoE said. “Such excessive tightening would hurt the wider economy and ultimately the banks themselves.” The central bank also announced that the safety net banks must build up and then release during a crisis must be increased to 2 percent by July 2023. It added that it will begin work on the next set of stress tests, which assesses individual banks ability to withstand future crises, in September. The exercise will involve “deep simultaneous recessions in the UK and global economies, real income shocks, large falls in asset prices and higher global interest rates”. There will also be a separate stress test for malpractice costs. Bailey said the BoE would support a review of “ultra-long” mortgages of up to 50 years, which could span generations. UK Prime Minister Boris Johnson told reporters last week that the government was considering the idea. Longer-term mortgages will protect customers from interest rate fluctuations much better than the relatively short-term fixed mortgages prevalent in the UK. Forty percent of which are set to expire in 2022 or 2023. The BoE report also noted that while extreme volatility in cryptocurrencies does not yet pose a risk to overall financial stability, systemic risks will arise if regulation is not put in place. The digital asset’s market capitalization has collapsed from a peak of $3 trillion in November to less than $1 trillion, as the failures of the interconnected cryptocurrencies Terra and Luna sent ripples through the broader sector. “I’m thinking about me [the collapse] it highlights the fact that we now need to introduce a regulatory system that manages the risks in the cryptocurrency world,” said Sir Jon Cunliffe, BoE deputy governor for financial stability. “I wouldn’t take the lesson that we don’t have to do anything because [the problem] he is gone.”
