Bank of England Warns That Eurozone Crisis Could Hurt UK Banking

By: Dr. Mike Campbell

We live in a highly interconnected world. This is particularly true within the financial section, so it should come as little surprise to learn that the Bank of England is concerned about risks to UK banking from the on-going Euro/sovereign debt crisis.

Whilst UK banks are not significantly and directly exposed in Greece or the other countries which are at the eye of the debt crisis storm, indirect exposure is, indeed, significant. UK banks act as “counterparts” to European mainland banks and so would be at risk of a “knock-on” effect should these banks collapse. Naturally, UK banks are not immune to market fears and jitters within the European financial sector may cause investors to avoid the entire region, including the UK. The uncertainty could lead to price depression for “risky” assets such as some corporate bonds. This may force UK banks to write-down the value of loans to such corporations, causing them to suffer heavy losses. Of course, all of this pessimism is purely speculative at the moment.

In a similar vein, the bank’s report also warned of potential risk to the sector stemming from the UK economy. They pointed to further potential pain within the UK housing sector if the UK economy is very weak and/or if an interest rate rise is needed. In this scenario, a large upsurge could be seen in Briton’s being unable to meet loan payments or being forced into default over their mortgages.

To put Greece’s problems into perspective in the larger scheme of things, it is interesting to note the Bank of England’s comments on the refinancing challenge that faces them as emergency government loans must be repaid and loans mature: "In the UK, the largest banks will need to refinance or replace around £750bn -£800bn... by the end of 2012." Unsurprisingly, the Bank of England stressed that a "credible plan" of refinancing was needed.