Watchdog warns of rate rise risk

Tim Wallace
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BANKS and the wider economy could be at risk from rising rates, as markets are so used to super-easy money, the Bank of England warned yesterday.

The influential financial policy committee (FPC) called for the City regulators to inspect banks and other finance firms to see how they can cope with a sudden rise in rates.

“There has been a progressive search for yield in an environment of highly stimulative monetary policy,” said deputy governor Paul Tucker. “The authorities need to be alert to whether financial stability could be threatened by excessive leverage or liquidity risk building up in any potentially vulnerable parts of the financial system.”

After the prudential regulation authority’s (PRA) review of banks’ capital levels found lenders had over-reported their buffers by around £50bn, the Bank is ordering annual stress tests to stop it happening again.

Big lenders may also have to change the way they report their capital positions so that they present both a more conservative picture to investors, and figures that are more easily comparable between banks.

However the FPC believes there is still room to ease some constraints on banks. Overall British banks’ liquidity buffers exceed the incoming legal requirements, and the FPC wants to temporarily make those requirements less strict. As a result banks should have access to another £70bn which they may lend out.