BoE: Economy shows signs of stability

Friday 18th December 2009

The country's financial system is significantly more stable than it was earlier this year, the Bank of England has said.

In its bi-annual Financial Stability Report published today, the Bank claims that the government's support for the banking system and monetary policy measures have helped stabilise the financial system over the last six months.

On the other hand, the report states that after "such a prolonged period of exuberance earlier in the decade," some banks still have "overstretched balance sheets." They remain vulnerable to slower-than-expected economic recovery.

It recommends that banks try to strengthen their balance sheets while the going is good, to prepare them in case of another downturn.

The report recommends tackling the primary causes of the financial crisis, namely "excessive risk-taking in the upswing of the credit cycle and insufficient resilience in the subsequent downturn".

New policy must remove the expectation that "too important to fail" institutions will receive public support in a crisis, while unsecured wholesale creditors will not share losses.

The report calls for policy that emphasises the risks across all financial institutions and the entire credit cycle, complemented by structural measures "to contain the spread of risk across the system".

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