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Posted by Monitor on June 26, 2009, 4:08 am
Bank of England Says Financial System Vulnerable to More Shocks
June 26, 2009 (Bloomberg) -- The Bank of England said financial
institutions=92 losses from the crisis have left them vulnerable to
another wave of shocks, including the risk that the economy will stay
mired in recession.
=93Given their leverage and funding positions, banks in the United
Kingdom and internationally will remain sensitive to further shocks
for some time,=94 the central bank said today in London. =93If economic
recovery were to stall as a result of weak bank lending, losses on
assets could rise, further affecting confidence in the banking
sector.=94
The bank=92s biannual financial stability risk assessment follows
Governor Mervyn King=92s comments that banking problems may make the
economy=92s escape from recession a =93long, hard, slog.=94 The report toda=
y
also makes suggestions on regulation changes including greater capital
buffers for institutions days before the Treasury unveils its own
proposals for a revamp.
=93Banks=92 balance sheets remain sensitive to any setbacks in recovery in
financial markets or real activity,=94 the bank said. =93The economic
downturn is still perceived by market participants as the highest risk
to financial stability.=94
Only 15 percent of banks said they are =93very confident=94 in the
financial system=92s stability in the next three years, compared with 36
percent in July 2008, a survey of 34 institutions in the report
showed. They cited an economic slump and borrower defaults as the
biggest risks. Responses were collected from April 27 to May 15.
Bank Losses
U.K. banks=92 loan book losses have now reached almost 400 billion
pounds ($654 billion), the bank said, without giving a forecast. The
European Central Bank said last week that lenders in the 16-nation
euro region may lose a further $283 billion by the end of next year.
=93While pressures on the major global banks have stabilized over the
past few months, their balance sheets remain impaired,=94 the Bank of
England said. =93Rising household and corporate distress, and continuing
falls in property prices, raise the possibility of further asset
impairment.=94
More losses risk adding further pressure to banks=92 profitability and
capital ratios, the bank said.
=93Future revenue generation will need to balance the desire to de-
leverage with the need to generate new business at profitable
spreads,=94 the bank said in its report.
The global financial system is also vulnerable to shocks from lenders
repatriating their financing in foreign countries, the report said.
U.K. banks had to weather the withdrawal of about $100 billion of
deposits to Russia in the fourth quarter.
Payout Liability
In the =93highly unlikely event=94 that the British government had to pay
out on all emergency guarantees and insurance facilities offered to
banks, the total liability would be $2.1 trillion, or 88 percent of
gross domestic product, the BOE said. That compares with 73 percent in
the U.S. and 18 percent in the euro area.
The Bank of England, suggesting changes to financial regulation, said
lenders should be required to provide their own insurance from shocks
by building up capital buffers with common equity and liquidity
buffers with high-quality government bonds. It said they also need
plans to obtain funding in times of stress and to wind down their
operations in case of failure.
Banks should also boost disclosure of the value of the assets they own
and give more details of their stress test and sensitivity analyses,
the central bank said.
=93Greater resilience will need to be based on a variety of measures,=94
Paul Tucker, deputy governor for financial stability at the bank, said
in a statement. =93The policy debate now under way matters enormously if
we are to achieve a more stable financial system in the future.=94
Global Regulation
The report urged international regulators to cooperate more closely to
manage risks posed by global financial institutions, whose cross-
border claims have almost doubled in the past decade. Regulators must
ensure they can monitor such firms while preventing them from becoming
too big or complex, the bank said.
The bank still expressed a note of optimism that the slump may have
past its worst after the U.K. economy contracted 1.9 percent in the
first quarter, the most since 1979. Banks=92 funding conditions are
improving as capital markets reopen and interest rates fall, the
report said.
=93In recent months, market conditions have improved and there are signs
that the pace of decline in gross domestic product is easing,=94 the
bank said. =93Some markets that had been effectively closed to all but
the strongest institutions appear to be reopening.=94
http://www.bloomberg.com/apps/news?pid=3D20601087&sid=3DaMAT5I3ciyW4
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