The Bank of England wrote to lenders on Friday to urge them not to underestimate the risk of loan defaults as higher inflation and increased interest rates hit more vulnerable borrowers.

In a letter to chief financial officers at financial institutions supervised by the BoE, which it published online, the central bank also warned them not to overestimate how much money they would recover when borrowers defaulted on loans.

"We encourage further efforts by firms to challenge whether models capture risks associated with affordability, including the impact of higher inflation and interest rates on vulnerable borrowers or sectors," Victoria Saporta, the BoE's executive director for prudential policy, wrote. (Reporting by David Milliken, Editing by Kylie MacLellan)