Eurozone debt ‘most immediate threat’ to UK financial stability, watchdog says

The eurozone’s debt crisis poses the biggest threat to Britain’s financial stability and banks must come clean on their full exposure, the financial policy committee says The eurozone’s debt crisis poses the biggest threat to Britain’s financial stability and banks must come clean on their full exposure, Britain’s new risk watchdog said on Friday. “Sovereign and banking strains are the most material and immediate threat,” the financial policy committee said in its inaugural report . The watchdog, which is chaired by Bank of England governor Mervyn King, turned up the heat on banks to use strong profits to boost capital cushions, but stopped short of specifying a figure. It also warned authorities needed to keep a closer eye on the explosion of opaque instruments, such as exchange traded funds, which banks are increasingly using to raise funds. The report came as EU leaders scramble to avert a Greek debt default that would send shockwaves through international markets. “Market concerns remain over fiscal positions in a number of euro area countries and the potential for contagion to banking systems,” the FPC said. “Any associated disruption to bank funding markets could spill over to UK banks.” Its key recommendations include: • Improved disclosure of sovereign and banking sector debt exposure by major banks on a permanent basis. • Requiring smaller banks, not part of current EU stress tests, to compile data on sovereign and banking debt exposure. • Ensuring banks use strong profits to build up capital cushions before new Basel III rules come in. • Asking the Financial Services Authority to report back to the committee by the fourth quarter on whether banks are adequately building up capital buffers. • Better monitoring of opaque funding structures such as collateral swaps or similar transactions used by exchange-traded funds. • Improved data from banks on forebearance in household and corporate sector. Financial policy committee Financial crisis Banking Financial sector Bank of England Economics Economic policy guardian.co.uk

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