The UK banking system maintains robust capital and strong liquidity positions and is well placed to continue supporting the economy throughout a wide range of economic scenarios, including in a period of higher interest rates.
That was the findings of the Bank of England’s Financial Policy Committee (FPC).
The FPC said the regulations in place for UK banks mean that they have significant financial resources to absorb shocks. UK bank profits are currently healthy, and UK banks have no significant exposures to banks which have failed or are in trouble.
“We judge that UK banks are resilient and are strong enough to continue supporting households and businesses,” it said.
The FPC pointed out that since the global financial crisis of 2008 UK authorities have put in place a range of regulations, designed to ensure levels of resilience which are at least as great as those required internationally.
It said the UK banking system is well capitalised with the aggregate Common Equity Tier 1 (CET1) ratio for major UK banks standing at 14.6%, while smaller lenders have an aggregate CET1 ratio of around 18%.
Asset quality is stronger now than in the run up to the global financial crisis.
Major UK banks have large liquid asset buffers, around two-thirds of which are currently either in the form of cash or central bank reserves.
The FPC noted the profitability of UK banks has increased recently, reflecting higher net interest income as interest rates have increased and that UK banks are not exposed to material losses associated with the failure of SVB and takeover of Credit Suisse.
It said it will continue to monitor developments closely, in particular for the risk that indirect spillovers impact the wider UK financial system.
The FPC also urged action to deal with liability driven investment funds (LDIs) which came under pressure in the wake of the mini budget in September.
The central bank was forced to step in with a new round of government bond purchases last autumn after Liz Truss’s package of unfunded tax cuts triggered a surge in gilt yields.
The FPC has recommended that The Pensions Regulator (TPR) takes action as soon as possible to mitigate financial stability risks by specifying the minimum levels of resilience for the LDI funds and LDI mandates in which pension scheme trustees may invest.
"The FPC judges that these factors imply that LDI funds should be resilient to a yield shock of around 250 basis points, at a minimum, in addition to the resilience required to manage other risks and day-to-day movements in yields," it said.
Banking share prices continue to recover from the recent volatility. LLoyds Banking Group PLC is 1% higher, HSBC Holdings PLC (LSE:HSBA) is 1.7% to the good while NatWest Group PLC (LSE:NWG) is also in the green, up 1%.