UK banks will have to set aside more cash to absorb shocks in financial markets from next year, although the Bank of England has said lenders are well placed to support households and businesses.
Authorities have ordered them to set aside 2% of their capital – around £22bn – as part of the countercyclical capital buffer from this time next year.
The buffer – introduced in the wake of the financial crisis to ensure banks have a rainy day fund – has been reduced to zero during the pandemic, freeing up billions of pounds to help businesses and households.
The Bank of England announced last December that it would be raised to 1% as conditions normalize. It will now drop to 2% after the mandatory 12-month notice to banks.
Officials have stressed they are ready to release the money again, especially if the economy performs worse than currently expected.
In a Financial Policy Committee report, the bank said lenders are still resilient, despite runaway inflation and the effects of Russian aggression in Ukraine.
“While downside risks will present headwinds, the FPC believes UK banks have the ability to weather the impact of severe economic outcomes,” he said.
But that would mean less money for borrowers, officials said in Tuesday’s report.
“In such scenarios, banks are likely to manage their lending activity cautiously, depending on developments in credit quality and the real economy.”
Some households are also likely to have difficulty repaying their debt. About 80% of mortgages now have fixed interest rates, compared to just 30% nine years ago.
But some 40% of them need to be renewed this year or next, driving up interest rates for those households.
“Tighter financial conditions and reduced real incomes will weigh on debt affordability for households, businesses and governments in many countries, increasing risks from global debt vulnerabilities,” the Bank said. .
Households have come under increasing pressure in recent months, with inflation hitting 9.1% in May.
There are a number of reasons for the skyrocketing cost of living, but the main one is the price of energy.
In April, energy bills soared for most UK households as Ofgem raised its price cap by 54% to £1,971 for the average household.
Experts believe this could rise again in October, to around £3,000, which could help push inflation to over 11% later this year.
“Commodity price volatility following the Russian invasion of Ukraine has further exacerbated the price pressures facing households and businesses, and has had implications for the financial system.”
The Bank said the proportion of households that will have to change their habits to be able to pay their debts will not increase much this year.
It will take time for tariff increases to be passed on to customers, and the blow will also be cushioned by government support.
The figure is expected to rise in 2023, but the number of struggling households will still remain well below the peaks seen following the financial crisis, officials said.