London Daily

Focus on the big picture.
Saturday, Jan 17, 2026

Bank of England identifies vulnerabilities due to rising interest rates but banking sector 'resilient'

Bank of England identifies vulnerabilities due to rising interest rates but banking sector 'resilient'

The Bank has been keen to eliminate any fears that the banking sector is coming under severe strain after a number of bank failures in the US triggered a loss of confidence in Credit Suisse.
Britain's banking sector is resilient to rising interest rates, the Bank of England has said.

The central bank's financial policy committee said that banks had the capacity to support lending to businesses and households even if interest rates climb higher than expected.

Central bankers have been eager to quash any fears that the banking sector is coming under severe strain after a number of high-profile bank failures in the US triggered a loss of confidence in Credit Suisse.

European banks have suffered a sharp drop in their share prices as investors "test" weaknesses in other banks.

The collapse of Silicon Valley Bank, the US's 16th largest bank, was driven by a sharp rise in interest rates that exposed weaknesses in the bank's risk management.

Central bankers across the world have been raising rates aggressively over the past year to combat a sharp rise in inflation.

Silicon Valley Bank was heavily invested in long-dated Treasury bonds, which have fallen in price as interest rates have climbed. The bank was forced to sell those bonds at a loss after suffering a major outflow of deposits.

In recent weeks UK policymakers have repeatedly underplayed the risk of UK banks facing similar problems.

In its latest report, the bank's financial policy committee said that the country's banks were well capitalised with large liquid asset buffers, around two-thirds of which are currently in the form of cash or central bank reserves.

While the UK has largely avoided the latest fallout, the committee recognised some vulnerabilities due to rising interest rates.

Last autumn it was forced to intervene with gilt purchases after a sharp rise in UK gilt yields exposed vulnerabilities in liability investment (LDI) funds, in which many pension schemes invest. This led to a vicious spiral of collateral calls and forced gilt sales.

The bank said on Wednesday that it is recommending the pension regulator "takes action as soon as possible to mitigate financial stability risks" by requiring funds to hold enough liquidity so that they can withstand, at a minimum, a 250 basis point change in interest rates.

It also noted that riskier corporate credit markets, made up of leveraged loans, high-yield bonds and private credit, were particularly vulnerable to rising rates.

This market has almost doubled in size over the past year as a decade of low-interest rates caused investors to go in search of higher yields.

"The FPC has been closely monitoring these events and judges that the UK banking system remains resilient," the bank said. "The FPC will continue to monitor developments closely, in particular for the risk that indirect spillovers impact the wider UK financial system".

They echoed comments made by Andrew Bailey, governor of the Bank of England, who said this week that the bank was "alert" to emerging risks but confident in the resilience of the banking sector.

Speaking on Monday at the London School of Economics, he said: "Suffice to say we believe the UK banking system is resilient, with robust capital and liquidity positions, and well placed to support the economy.

"We have a strong macroprudential policy regime in this country. With the financial policy committee on the case of securing financial stability, the monetary policy committee can focus on its own important job of returning inflation to target."
Newsletter

Related Articles

0:00
0:00
Close
Trump to hit Europe with 10% tariffs until Greenland deal is agreed
Prince Harry Returns to UK High Court as Final Privacy Trial Against Daily Mail Publisher Begins
Britain Confronts a Billion-Pound Wind Energy Paradox Amid Grid Constraints
The graduate 'jobpocalypse': Entry-level jobs are not shrinking. They are disappearing.
Cybercrime, Inc.: When Crime Becomes an Economy. How the World Accidentally Built a Twenty-Trillion-Dollar Criminal Economy
The Return of the Hands: Why the AI Age Is Rewriting the Meaning of “Real Work”
UK PM Kier Scammer Ridicules Tories With "Kamasutra"
Strategic Restraint, Credible Force, and the Discipline of Power
United Kingdom and Norway Endorse NATO’s ‘Arctic Sentry’ Mission Including Greenland
Woman Claiming to Be Freddie Mercury’s Secret Daughter Dies at Forty-Eight After Rare Cancer Battle
UK Launches First-Ever ‘Town of Culture’ Competition to Celebrate Local Stories and Boost Communities
Planned Sale of Shell and Exxon’s UK Gas Assets to Viaro Energy Collapses Amid Regulatory and Market Hurdles
UK Intensifies Arctic Security Engagement as Trump’s Greenland Rhetoric Fuels Allied Concern
Meghan Markle Could Return to the UK for the First Time in Nearly Four Years If Security Is Secured
Meghan Markle Likely to Return to UK Only if Harry Secures Official Security Cover
UAE Restricts Funding for Emiratis to Study in UK Amid Fears Over Muslim Brotherhood Influence
EU Seeks ‘Farage Clause’ in Brexit Reset Talks to Safeguard Long-Term Agreement Stability
Starmer’s Push to Rally Support for Action Against Elon Musk’s X Faces Setback as Canada Shuns Ban
UK Free School Meals Expansion Faces Political and Budgetary Delays
EU Seeks ‘Farage Clause’ in Brexit Reset Talks With Britain
Germany Hit by Major Airport Strikes Disrupting European Travel
Prince Harry Seeks King Charles’ Support to Open Invictus Games on UK Return
Washington Holds Back as Britain and France Signal Willingness to Deploy Troops in Postwar Ukraine
Elon Musk Accuses UK Government of Suppressing Free Speech as X Faces Potential Ban Over AI-Generated Content
Russia Deploys Hypersonic Missile in Strike on Ukraine
OpenAI and SoftBank Commit One Billion Dollars to Energy and Data Centre Supplier
UK Prime Minister Starmer Reaffirms Support for Danish Sovereignty Over Greenland Amid U.S. Pressure
UK Support Bolsters U.S. Seizure of Russian-Flagged Tanker Marinera in Atlantic Strike on Sanctions Evasion
The Claim That Maduro’s Capture and Trial Violate International Law Is Either Legally Illiterate—or Deliberately Deceptive
UK Data Watchdog Probes Elon Musk’s X Over AI-Generated Grok Images Amid Surge in Non-Consensual Outputs
Prince Harry to Return to UK for Court Hearing Without Plans to Meet King Charles III
UK Confirms Support for US Seizure of Russian-Flagged Oil Tanker in North Atlantic
Béla Tarr, Visionary Hungarian Filmmaker, Dies at Seventy After Long Illness
UK and France Pledge Military Hubs Across Ukraine in Post-Ceasefire Security Plan
Prince Harry Poised to Regain UK Security Cover, Clearing Way for Family Visits
UK Junk Food Advertising Ban Faces Major Loophole Allowing Brand-Only Promotions
Maduro’s Arrest Without The Hague Tests International Law—and Trump’s Willingness to Break It
German Intelligence Secretly Intercepted Obama’s Air Force One Communications
The U.S. State Department’s account in Persian: “President Trump is a man of action. If you didn’t know it until now, now you do—do not play games with President Trump.”
Fake Mainstream Media Double Standard: Elon Musk Versus Mamdani
HSBC Leads 2026 Mortgage Rate Cuts as UK Lending Costs Ease
US Joint Chiefs Chairman Outlines How Operation Absolute Resolve Was Carried Out in Venezuela
Starmer Welcomes End of Maduro Era While Stressing International Law and UK Non-Involvement
Korean Beauty Turns Viral Skincare Into a Global Export Engine
UK Confirms Non-Involvement in U.S. Military Action Against Venezuela
UK Terror Watchdog Calls for Australian-Style Social Media Ban to Protect Teenagers
Iranian Protests Intensify as Another Revolutionary Guard Member Is Killed and Khamenei Blames the West
Delta Force Identified as Unit Behind U.S. Operation That Captured Venezuela’s President
Europe’s Luxury Sanctions Punish Russian Consumers While a Sanctions-Circumvention Industry Thrives
Berkshire’s Buffett-to-Abel Transition Tests Whether a One-Man Trust Model Can Survive as a System
×