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Debt default fears a ‘key risk’ to banking system

Fears of debt default by floundering European economies pose a “key risk” to the banking system, the Bank of England warned today.

Investors retreating from risk in the wake of the crisis which engulfed Greece in April could make it more difficult and expensive for banks to renew billions of pounds in existing funding, the Bank's latest Financial Stability Report (FSR) said. The turmoil risked spreading to other weaker economies such as Portugal and Spain — prompting a slew of ratings downgrades and a joint €750bn (£616bn) bailout by the European Union and the International Monetary Fund in May.

This helped stave off an immediate catastrophe but “market pressures have not yet abated”, the report warned.

Growth in Europe could be hit if investors shift their money towards healthier emerging market countries — putting further pressure on bank balance sheets, today’s report added.

The banking sector also faces risks from falling US and UK house prices as well as over-extended borrowers in commercial property — which could lead to growing corporate insolvencies, the Bank said.

In terms of resilience, the report says that UK banks have raised their capital and liquidity buffers substantially, which has helped them weather recent economic tensions.

But, in common with their peers, they face a number of challenges in the period ahead.

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