The deepening eurozone crisis is a threat to Britain’s just rescued banks, the Bank of England warns in its latest Financial Stability Report out yesterday.
British banks have a £210bn exposure to Spanish and Irish debt.
Another £288bn is in German and French debt, which may be under threat if the eurozone crisis worsens.
The Bank says in its report that there needs to be a ‘comprehensive, rather than country-by-country, solution’ to the crisis.
It adds: ‘Recent events also underline the need for the next EU-wide stress-test exercise to provide greater transparency about banks’ resilience to these risks.’
It warns that the main credit risk to the UK banks is from ‘the possibility of losses on lending to euro-area households and companies, should sovereign and banking concerns spill over to weaker-than-expected growth in the euro area.’
Concerns about government debt levels ‘could also expose UK banks to funding risks and the UK economy to the withdrawal of lending by foreign banks.’
It further warns: ‘In a low interest rate environment, financial institutions — such as insurance companies and pension funds — might be encouraged to take on higher risk to meet their targets.’
This makes them ‘susceptible to a sudden reversal’, the Bank warns.
Also warning on the dangers of domestic UK debt, the report calculates that more than seven million home owners are at risk of losing their homes if interest rates rise.
The Bank cautions mortgage holders to start paying off their debts to avoid getting into difficulty as repayments increase.
Its report warns that around two thirds of outstanding mortgages, equivalent to 7.2 million, are now variable rate deals.
It says: ‘Currently, around two thirds of outstanding mortgages in the United Kingdom have floating interest rates, somewhat above the average over the past five years.
‘That proportion is rising as mortgagors move on to standard variable rate products as existing fixed-rate deals expire.
‘This exposes more households to the risk of increases in interest rates.’
The Bank goes on to warn: ‘Given current levels of debt, UK banks might face higher defaults if interest rates were to rise rapidly from current levels or if income and employment were to fall.’
Its report notes that Britain’s four biggest banks – Royal Bank of Scotland, Lloyds Banking Group, Barclays and HSBC – have set aside £71bn in provisions for bad debt.
But losses on consumer debts alone, such as mortgages and credit cards, will be £100bn if ‘write-off rates return to their pre-crisis average’ and £150bn if losses on bad debts hit ‘levels seen in the early 1990s recession’.