Bank of England: UK threatened by foreign debt crisis

The Bank of England has warned that the European debt crisis is a major risk for the UK's financial services sector.

In its semi-annual Financial Stability Report, the organisation said that UK banks' exposure to European lenders has increased their risk of being adversely affected by issues such as the sovereign debt problems of Greece.

'Concerns over Greek sovereign risk spilled over to other European countries and developed rapidly into a generalised retreat from risk-taking. Inadequate transparency about sovereign exposures led to counterparty concerns and renewed strains in bank funding markets,' the document explained.

While British banks have relatively few direct links with institutions in Greece and other nations struggling with debt, their collapse could have a knock-on effect through other European banks to which UK lenders are more closely tied.

However, the report also welcomed moves by the European Union and the International Monetary Fund to offer support packages to Greece in a bid to halt the fallout of its debt crisis.

Last week, chancellor George Osborne used his Mansion House speech to unveil major changes to the regulation of the UK's financial sector, including the breaking up of the Financial Services Authority and new powers for the Bank of England.