LONDON: UK banks can survive the “deteriorated economic outlook” with the sector more resilient than during 2008 financial crisis, but must increase their capital reserves, the Bank of England said Tuesday. Updating on the health of retail lenders, the BoE’s Financial Stability Report noted that the “economic outlook for the UK and globally has deteriorated materially”.

“Developments related to the Russian invasion of Ukraine are a key factor that will affect both the global and UK outlooks, particularly if energy and food prices rise further,” the central bank added. The BoE update comes as markets increasingly bet on major economies falling into recession this year as central banks hike interest rates to combat decades-high inflation.

“The economic outlook is uncertain and undoubtedly a very challenging one for many households and businesses,” BoE governor Andrew Bailey told a press conference focused on the report.

“The banking system is resilient to that outlook, however, or indeed even a much worse one and that’s a sharp contrast to the financial crisis,” he added.

The global financial crisis more than a decade ago triggered massive state bailouts of retail banks, while some lenders were left to collapse.

The BoE on Tuesday added that “headwinds to the global and UK economic outlooks pose risks to UK banks”.

With that it mind, the central bank said it would increase the UK countercyclical capital buffer rate to two percent in a year’s time from one percent currently.

“This aims to ensure the buffer is large enough to create capacity for banks to absorb shocks, so they are able to continue to lend through downturns,” the BoE noted.

It added that “the impact of the Russian invasion of Ukraine on commodity markets could lead to losses on some lending exposures”.

The Bank of England also warned that “headwinds to the Chinese economy could adversely affect some internationally focused UK banks”.

Lenders meanwhile risked impairments arising from “financial pressures for UK households and businesses”.