The Bank of England warned banks and borrowers on Wednesday that a potential quick rise in global interest rates could do severe damage to global economic recovery.
The bank’s financial stability report, by financial risk regulator the Financial Policy Committee, reads: “Financial institutions and markets are also vulnerable to an abrupt rise in global interest rates.”
That is counted as a key risk to financial stability in the short term. Risks in the medium term to financial stability include weak and uncertain economic growth worldwide, as well as vulnerabilities in the insurance and pension sectors.
Bank Deputy Governor Paul Tucker also highlighted capital shortfalls at banks, arguing that banks need more capital to safeguard against unusual international economic and financial threats.
He said that as of the end of 2013, five major U.K. banks had a capital shortfall of about 25 billion pounds (U.S. equivalent) in total, compared to required U.K. standards set by policymakers.
Banks have complained that high capital requirements restrict their ability to lend, reports Reuters, even as the Bank of England disputes this.
The report recommends that U.K. financial regulators assess how banks and consumers could be impacted by sharply rising interest rates, after a lengthy period of low interest rates worldwide.
Central banks could hike interest rates back up in 2015, as the need for stimulus measures seems to slowly abate.
The Bank of England’s new governor, Mark Carney, is slated to start work on Monday. In what are probably his final public remarks before retiring, current Governor Mervyn King accused British banks of working to undermine a new regime of financial regulation.