- In order to curb rapid inflation, the central bank raised its key interest rate from 0.1% in December 2021 to the highest level in 15 years, currently 5.25%.
- And the market expects a further rise to 5.5% later this week.
In August, the Bank of England raised interest rates for the 14th time in a row.
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Bank of England deputy governor Sam Woods said the UK banking sector is seeing a rise in impairments amid rising inflation and resulting interest rate rises.
To curb runaway inflation, the central bank raised its benchmark interest rate to a 15-year high of 5.25% from 0.1% in December 2021, and the market expects a further hike later this week to 5.5% .
The economy has proven surprisingly resilient, but Woods, also CEO of the Prudential Regulation Authority, said regulators are closely monitoring possible strains in the banking sector.
“So far, things have been a little better than a lot of people expected, and of course the tremendous fiscal and monetary support, particularly from Covid, has actually protected the banking system from credit losses,” Woods told CNBC on Tuesday.
“But when we look at it now, we are actually seeing an increase in disruption across the banking sector. This is not something people should be alarmed about.”
The PRA estimates that just over 1% of mortgages are in arrears. Woods noted that the number was just as high in 2018 and was 3.6% during the financial crisis.
“So it’s looking up, but from a very low base and we’re keeping a close eye on it,” he added.
The global banking system was rocked by the collapse of several small US lenders earlier this year, but Woods stressed that the smaller British banks were more than three times better capitalized than they were during the financial crisis.
However, he said the UK’s system of shadow banks – which provide financial intermediation services and provide loans but are not subject to the same regulations as commercial banks – remained a concern for the PRA. This is particularly true given events such as the collapse of small family office Archegos Capital in 2021, which caused more than $10 billion in damage to the global banking system.
“This is a truly shocking and extraordinary number and the best evidence that shadow banking can still be quite painful to the system,” Woods said.
The non-bank financial sector came into focus in the UK in September 2022 when the Bank of England intervened to prevent the collapse of several British pension funds after a crash in government bond prices and massive interest rate movements exposed vulnerabilities in certain instruments.
Woods said the PRA is also keeping an eye on these institutions and remains “very alert” to the risks, as well as those arising from China’s economic headwinds. China’s real estate market is suffering from waning consumer confidence, with real estate giants Evergrande and Country Garden on the brink of mounting debt.
“We are of course interested in commercial real estate, like everyone else, and we are particularly interested in what is happening in the real estate market in China because some of our banks are very active there and are currently experiencing a significant downturn,” he added added.