The Bank of England is pushing U.K. banks to have plans in place in case the Greek debt crisis escalates or the country leaves the euro area.
While lenders have reduced ties with Greece, the BOE said exposures to highly indebted euro-zone nations remain “significant” and carry “material risks.” Staff are working with the U.K. Treasury and the Financial Conduct Authority to ensure contingency plans are in place. The BOE also issued a warning about Britain’s record current-account deficit.
The comments from the BOE’s Financial Policy Committee follow a statement from the panel last month about potential market stresses related to turmoil in Greece and elsewhere. These could lead to increased market volatility because of a shortage of liquidity, undermining financial stability.
“The economies of other peripheral euro-area countries were strengthening and the resilience of their banking systems had improved,” the FPC said in the record of its March meeting, published in London on Tuesday. “Nevertheless, the committee judged that, were Greece and its euro-area partners to be unable to reach an agreement, more significant effects could arise.”
On the current account deficit, the FPC said it could, “in adverse circumstances, trigger a deterioration in market sentiment.” The shortfall amounted to 5.5 percent of GDP last year, the most since records began in 1948.
The committee said it will keep the issue “under close review and would monitor the maturity and liquidity of the financing of the deficit.”
The FPC also highlighted potential risks posed by a loosening of underwriting standards in commercial real estate. While it said action wasn’t necessary now, a continuation could “quickly become less resilient to stress.”
“Mindful of the past cyclicality of these markets, the committee agreed that it would consider appropriate action if underwriting standards threatened to evolve in a unsustainable way,” the FPC said.