UK banks vulnerable to financial setbacks: Bank of England

At a time when there are hopes of recovery in the banking sector, the Bank of England today warned that the country's banks remain prone to financial shocks in the future.     

The apex bank has said that even though the pressure has eased on banks in recent months, their balance sheets continue to be impaired.     

"Given their size, leverage and liquidity mismatches, however, banks' balance sheets remain sensitive to any setbacks in recovery in financial markets or real activity," the central bank said in its 'Financial Stability Report'.     

The Bank of England said that most of the banks have high leverage which could adversely impact their profitability in the future.     

"... While pressures on the major global banks have stabilised over the past few months, their balance sheets remain impaired. Banks' leverage remains high, with the possibility of further impairment of assets placing continued pressure on profitability and capital ratios," the apex bank noted.     

Ravaged by the global financial turmoil, the British government was forced to come to the rescue of many leading banks including the Royal Bank of Scotland. The United Kingdom pumped in billions of pounds into the banks to tide over the crisis.

The report said that major British banks are witnessing high customer funding gap — the difference between customer loans and deposits, primarily due to withdrawal of overseas funding and competition for domestic deposits.     

"The UK banks entered the financial crisis with a significant customer funding gap — the difference between customer loans and deposits — which continued to rise in 2008, reaching around 800 billion pounds...," the central bank noted.     

According to the report, in case the economic conditions worsen further, banks may not be able to supply sufficient credit to support economic growth.