Bank of England lists key risks in UK financial system

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By Besta Shankar | June 25, 2010 11:34 PM EST

In its bi-annual financial stability report, released on Friday, the Bank of England has cautioned UK banks on serious risks ahead and adviced them to accumulate more reserves to deal with future challenges.

“Banks must meet demanding future regulatory requirements,” the report said.

The reports stresses on more actions from the banks to meet the new regulatory requirements, though it finds a significant improvement in the capital and liquidity status of the banks.

In the wake of crisis in Spain, Portugal and Greece, the central bank warned on counter-party risks for UK banks while dealing wtih weak institutions which have high exposure to weaker economies.

Here are some key risks the bank listed in its report:

• Counterparty risks emerging out of European banks' direct exposure to economies troubled by sovereign debt crisis.
• Risks of banks globally in refinancing maturing funding and reducing the value of banks’ assets, in the scenario of continued setback of investor risk appetite.
• A change in investments across various geographies and risks impacting the growth and credit risk in Europe.
• UK borrowers facing payment troubles as a result of overstretching of balance sheets with a mismatch of growth and expectations or interest rate increasing above the anticipated levels.
• Increase in bad loans arising out of any weakness in UK and US housing markets
• Decline in economic growth and Increased credit risks to banks due to restrictions on lending by banks to comply with the future regulatory requirements and to ease funding problems.

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