UK 'only partially insulated' from eurozone debt crisis

The UK is only "partially insulated" from the escalating eurozone debt crisis, the Bank of England warned today.

In its latest Financial Stability Report, the Bank said there was uncertainty surrounding the impact that Europe's sovereign debt woes could have on Britain's own financial sector.

Banks could strengthen themselves against such risks by holding on to profits and cutting back on dividends and bonuses, the Bank added.

Greece and Ireland have accepted multibillion-pound bailouts from the European Union (EU) and International Monetary Fund (IMF) and there are fears countries such as Portugal and Spain will follow in their footsteps.

The report said: "Sovereign and banking system concerns have re-emerged in parts of Europe.

"The IMF and European authorities proposed a substantial package to Ireland. But market concerns spilled over to several other European countries."

It went on: "The UK is only partially insulated given the interconnectedness of European financial systems and the importance of their stability to global markets."

The improved resilience of UK banks in the past year and tighter European rules designed to strengthen banks against an economic downturn provide insurance against the risks, the report said.

Basel III regulations require banks to retain higher levels of capital to build up a buffer to protect against potential losses.

In a nod to bankers' bonuses, the report adds: "It is the banks' collective interest to build resilience through the retention of earnings, which would be boosted if banks restrain distribution of profits to equity holders and staff."

The latest blow to the eurozone came on Wednesday when key agency Moody's placed Spain's credit rating on review for a downgrade.

Bond yields in key countries - including Spain and Ireland - have hit record highs recently as investors look to dump bonds, reflecting a lack of confidence in a country's finances.

Economists, most recently including deputy governor at the Bank of England Charles Bean, have raised concerns over the threats Europe's debt woes pose to the UK economy. A weakened eurozone could also hit the UK's export trade - seen as key to a healthy economic recovery.