The Bank of England sees UK banks as well capitalised and with strong liquidity positions, with the capacity to support households and businesses even if economic and financial conditions are substantially worse than expected, minutes of the June Financial Policy Committee meeting showed.

With asset quality strong, the FPC maintained the Counter Cyclical Capital Buffer at the neutral 2%, though it stands ready to vary the rate in either direction if needed.

The return on equity for major UK banks has risen in aggregate to around the cost of equity, the minutes showed, though they noted global risks, including U.S. commercial real estate, the Chinese property market and some FX pressures from global interest rate differentials. But the FPC said banks would be resilient even if residential property prices declined by 30% in China and 40% in Hong Kong.

Geopolitical risks included conflicts in Ukraine and the Middle-East and an uncertain economic outlook.

The UK consumer remained resilient to higher interest rates, with the debt-to-income ratio at low levels. The effect of higher mortgage rates will continue to weigh in aggregate for some time, as fixed-rate loans taken out just prior to or in the early months of the Covid pandemic are refinanced.

The FPC said the outcome of its “desk-based” stress test would be published before the end of 2024, likely in December. The test will include scenarios for both deep supply- and demand-side shocks.https://www.bankofengland.co.uk/financial-stability-report/2024/june-2024