Bank of England: more volatility could expose UK financial weak spots

LONDON (Reuters) -More sharp moves in asset prices could expose weaknesses in parts of Britain's financial system, the Bank of England warned on Wednesday, with confidence in international banks shaken recently by some high-profile failures.

In a letter to lawmakers, the BoE said the strains affecting global banks could still hurt Britain's economy, through higher borrowing costs for consumers and businesses.

The Swiss government-backed takeover of Credit Suisse by UBS in recent days has helped soothe concerns over European financial stability.

But the wipeout of some Credit Suisse bondholders has sent shockwaves through bank debt markets, while the speed with which trouble spread from regional U.S. banks to humble a big systemic bank in Europe has rattled markets.

"Should there be further volatility and/or sharp moves in asset prices, there are risks it could trigger the crystallisation of previously identified vulnerabilities in market-based finance, amplifying any tightening in credit conditions," BoE Governor Andrew Bailey said in a letter to parliament's Treasury Committee.

Bailey added that the Financial Policy Committee, which oversees the stability of the financial system, was "continuing to closely monitor these events, and the extent to which they may impact the wider UK financial system".

Market-based finance refers to corporate capital markets and non-bank financial firms like pension funds, whose financial structure exacerbated a sharp sell-off in British government bonds last September, triggered by the economic agenda of then- prime minister Liz Truss.

Bailey reiterated on Wednesday that Britain's banking system is well-capitalised and remains "safe and sound".

Despite recent wobbles in the global banking system, financial markets now think it is almost certain that the BoE will raise interest rates again on Thursday, following a stronger-than-expected inflation reading for February.

(Reporting by Andy Bruce, Editing by Kylie MacLellan)