August 15, 2022

Bank of England Urges Clarity in Sovereign Debt Exposure

LONDON — The Bank of England governor, Mervyn A. King, said Friday that the worsening debt crisis in Greece and other European countries is currently the biggest threat to Britain’s financial system.

Mr. King urged British banks to be especially diligent and clear in disclosing their exposure to European sovereign debt, to avoid a collapse of confidence among investors. He also called on banks to set aside more capital when earnings are strong instead of distributing it to shareholders or employees.

“The most serious and immediate risk to the U.K. financial system stems from the worsening sovereign debt crisis in several euro-area countries,” Mr. King said during a briefing on financial stability by the interim Financial Policy Committee, which he chairs.

The newly created committee, which includes executives from the Bank of England and the Financial Services Authority, is a result of Prime Minister David Cameron’s revamp of the country’s financial regulation following the banking crisis.

Mr. King’s comments came as European Union leaders met in Brussels to discuss an aid program for Greece and ways to stabilize the area that shares the euro as a single currency. Greece has until the end of the month to meet conditions for its next financial aid payment of €12 billion, or $17 billion, ahead of a finance ministers’ meeting on July 3.

Some investors remain concerned that the Greek prime minister, George A. Papandreou, could struggle to gather enough support to push through the necessary budget cuts, which has pushed down the euro and weighed on European stock markets in recent days. Jean-Claude Trichet, the president of the European Central Bank, warned earlier this week that the sovereign debt crisis posed a serious threat to the financial stability of Europe.

“Any escalation of stresses could also be transmitted via interconnected global markets, including via the United States, leading to a tightening of bank funding conditions,” the Financial Policy Committee said. “Such contagion could be amplified if bank creditors were unsure about the resilience of their counterparties.”

Mr. King said he was less worried about British banks’ direct exposure to Greek debt, which he said was “very small,” but that a lack of transparency and increased risk-awareness could paralyze financial markets.

“If there’s uncertainty about exposures and a lack of transparency, there’s always the risk that people may feel it’s just not worth continuing the rollover funding to institutions,” Mr. King said. “Greater clarity about the extent of these exposures would help to limit the transmission of problems to U.K. banks.”

The European Banking Authority said Friday that it had adjusted its stress tests of European banks to better account for potential trading losses on sovereign debt from troubled economies, including Greece. The results are due next month.

“It’s necessary that stress tests are credible,” Mr. King said. The hope is that detailed data on the banks’ capital and government debt exposure would calm those investors who fear a Greek default.

The Financial Policy Committee also warned that British banks should improve their provisioning for real estate loans that are in arrears or had breached some covenants. The committee implied that some banks were not diligent enough in setting aside money to cover such loans, which were mainly for commercial real estate.

The committee also said it was increasingly mindful of risks linked to exchange-traded funds, which are now worth $300 billion in Europe, and asked the Financial Services Authority to monitor the industry more closely.

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