Britain’s banks have been told they must hold more capital due to the deterioration in the UK economic outlook.
In the latest Financial Policy Committee bi-annual review, the Bank of England noted signs of a toughening stance on mortgages and lending to businesses due to the inflation squeeze.
Even so, the BoE said it wanted banks to raise their countercyclical capital buffer to 2% from 1% by next summer, a move that would mean them holding an additional £22bn of capital.
This buffer was eased during the pandemic to help keep the economy moving but now tightening up lending policies “to reflect the new risk environment is appropriate”.
“The economic outlook for the UK and globally has deteriorated materially,” the FPC said.
“These higher prices, weaker growth and tighter financing conditions will make it harder for households and businesses to repay or refinance debt.
“Given this, we expect households and businesses to become more stretched over coming months. They will also be more vulnerable to further shocks.”
Even with this additional risk, the BoE said that it expects the UK banking sector to cope.
"The UK banking system remains strong," said Andrew Bailey, the Bank's governor.
Shares in UK banks fell on the announcement with Lloyds down 2.8% to 41.5p, Barclays down 5.3% at 147.3p and NatWest off 3.2% at 214.8p as analysts speculated that the BoE's move would affect dividend payouts across the sector.