Bank of England warned lenders about an abrupt increase in long-term interest rates and asked banks to raise their capital levels.
In its half-yearly Financial Stability Report published on Wednesday, the U.K. central bank recommended financial sector supervisors to provide an assessment about the vulnerability of borrowers to sharp upward movements in interest rates.
They should submit the report to the Financial Policy Committee in September. Some U.K. borrowers are highly indebted, which could result in losses for lenders, the bank warned.
The FPC last week demanded major banks to raise GBP 13.7 billion of extra capital.
The outlook for financial stability is still clouded by risks from a weak and uneven global recovery, and imbalances in the euro area, the report said.
Markets saw sharp sell-off following the announcement by the Federal Reserve about its plan to scale back bond purchase programme.
Outgoing BoE Governor Mervyn King yesterday told lawmakers at a hearing that markets have "jumped the gun" about the timing of lifting interest rates.
BoE Deputy Governor Paul Tucker today said the recent 'violence' of the financial market moves underlines the intensity of the search for yield.
Further, the FPC said that banks hold liquid assets more than 100 percent requirement. The big four banks have additional scope to reduce their liquid asset holdings by around GBP 70 billion.
"The impact of looser liquidity requirements on credit conditions is uncertain," the report said.
"By removing possible impediments to an expansion of credit supply, the Committee intends to give the banking system more flexibility to lend," it added.
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