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Brexit uncertainty could cause credit crunch: Bank of England

By Ben Woods

Published 30/03/2016

Governor of the Bank of England, Mark Carney
Governor of the Bank of England, Mark Carney

The Bank of England has warned over a potential credit crunch and urged lenders to bolster their balance sheets ahead of the EU referendum.

The Bank's Financial Policy Committee (FPC) said the UK banking sector was "resilient", but that heightened uncertainty triggered by the forthcoming referendum on EU membership posed a risk to financial stability.

It added the value of the pound - which plummeted earlier this year amid Brexit fears - could weaken even further and impact the cost and availability of finance for UK borrowers.

The concerns come amid a backdrop of tough trading for the banking sector, which has seen its profits come under pressure as interest rates have remained low across major economies.

In the minutes from its latest policy meeting, the FPC said: "The committee assesses the risks around the referendum to be the most significant near-term domestic risks to financial stability."

The FPC added the outlook for bank profitability had weakened since November as low interest rates made it difficult for lenders to achieve returns on loans.

That came as heavyweight financial stocks faced sustained pressure earlier this year when investors took flight amid fears some banks were not holding enough capital to withstand a potential economic crisis.

The FPC said UK bank share prices had fallen by about 15% since November 2015, warning that if weaker earnings persist it would reduce the "capacity of the system to withstand shocks".

The Bank of England also revealed the outline for its latest stress test on the banking system, which will investigate the resilience of the financial sector to a major economic shock.

The test will discover if banks and building societies have the buffers in place to weather a cocktail of pressures, including a slump in global GDP to -1.9%, a fall of 4.3% in UK GDP and a 4.5% rise in unemployment. Results are due in the fourth quarter of 2016.

Belfast Telegraph

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