The UK banking system is well capitalized and maintains large liquidity buffers, the Financial Policy Committee of the Bank of England said Wednesday.
In the Financial Stability Report, the committee said asset quality remains relatively strong and higher interest rates had a limited impact on credit risk so far. Nonetheless, the overall risk environment is challenging.
The central bank said the major UK banks were resilient to a severe stress scenario. The test incorporated persistently higher global inflation, rising global interest rates, deep simultaneous recessions in the UK and global economies.
No individual bank is required to strengthen its capital position as a result of the test. This suggests that major UK banks have the ability to withstand the severe macroeconomic stress and also possess the capacity to support British households and businesses.
Further, the test found that banks would incur loan losses of GBP 125 billion over a five year period. Despite this upward pressure on impairments, the improvements in asset quality provide a partial offset.
The FPC observed that the British economy has remained resilient to interest rate risk. However, it will take time for the full impact of higher interest rates to feed through.
