Bank of England's Report Highlights Ongoing Risks Amid Global Tensions

The Bank of England (BoE) released its semi-annual Financial Stability Report on July 9, 2025, highlighting persistent risks to the UK's financial stability due to ongoing geopolitical tensions, global trade fragmentation, and sovereign debt pressures. Despite a temporary easing following the U.S. pause on tariff implementations, the BoE cautioned about potential sharp declines in risky asset prices and disruptions in asset allocations.

The report noted that while global equities have largely rebounded since the turbulence in April, bond markets remain volatile amid concerns over significant borrowing plans in key economies. UK government bond prices faced recent pressure following a reversal of welfare cut plans and political uncertainty surrounding Finance Minister Rachel Reeves. The Office for Budget Responsibility also flagged Britain's public finances as vulnerable due to post-pandemic spending.

Encouragingly, the BoE reported that British households, businesses, and the domestic banking system remain robust. Consequently, the central bank is maintaining the counter-cyclical capital buffer at 2% to ensure banks retain sufficient reserves to sustain lending during economic downturns.

In a move aimed at supporting first-time homebuyers, the BoE announced a relaxation in mortgage lending rules. Individual UK banks and building societies are now permitted to issue more high loan-to-income (LTI) mortgages. While the sector-wide cap remains at 15%, individual entities may now exceed this limit. This adjustment addresses the BoE's finding that banks have been operating well below the threshold, potentially hindering market growth. The central bank noted, however, that deposit requirements remain a significant barrier for many prospective buyers.

Deputy Governor Sarah Breeden called for an international discussion on the optimal use of bank capital buffers, drawing on lessons learned from the COVID-19 pandemic. She emphasized the value of initiating a global debate to reassess the appropriateness and usability of these buffers.

The Financial Stability Board (FSB) proposed new measures to curb leverage among hedge funds and other non-bank financial institutions to enhance financial stability. Proposed actions include requiring enhanced disclosure of leverage data, increased central clearing of transactions, stricter refinancing borrowing rules, and potential leverage caps. The BoE identified vulnerabilities in the UK repo market, with hedge fund borrowing reaching £77 billion.

On July 9, 2025, the British pound remained steady amid investor reactions to the BoE's financial stability report and growing concerns over escalating global trade tensions. Sterling held around $1.35 against the U.S. dollar and rose 0.17% against the euro to 86.14 pence.

The BoE's emphasis on maintaining financial stability amid global uncertainties is crucial for sustaining economic growth and employment. Ensuring that banks have sufficient capital buffers allows them to continue lending to households and businesses, supporting economic activity.

The Bank of England's July 9, 2025 Financial Stability Report provides a comprehensive assessment of the current risks facing the UK financial system. While the domestic banking sector remains resilient, the BoE emphasizes the need for vigilance in the face of global uncertainties. The report's findings and recommendations offer valuable insights for policymakers, financial institutions, and the public as they navigate the complexities of the current economic landscape.