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Bank of England says Brexit carries risk of credit crunch 

March 30, 2016

Martin Arnold, Financial Times

The Bank of England has warned that uncertainty over Britain’s membership of the European Union carries the risk of a credit crunch, as it raised the bar for banks to pass this year’s stress tests of the sector.

The BoE said that Britain’s EU referendum in June represents “the most significant near-term domestic risk to financial stability”.

But it added that the banking sector was strong enough to withstand a severe shock and still lend to households and businesses.

Banks are being asked to clear a higher bar in this year’s stress tests, which model a deeper shock to the global economy than the past two exercises and for the first time formally include two extra capital buffers in the overall requirements for banks.

The BoE warned that the UK’s high current account deficit left it vulnerable to a Brexit vote, which could trigger a rise in borrowing costs for the government, businesses and households. It added that borrowing costs could also rise in the eurozone with a knock-on effect on UK growth.

“Heightened and prolonged uncertainty has the potential to increase the risk premia investors require on a wide range of UK assets, which could lead to a further depreciation of sterling and affect the cost and availability of financing for a broad range of UK borrowers,” the BoE said in a statement from its Financial Policy Committee. Read more

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