Thursday, May 01, 2008
The Bank's financial stability report
Posted by David Smith at 09:30 AM
Category: Thoughts and responses

Is the glass half full or half empty? The Bank of England's six-monthly Financial Stability Report has been reported as saying the worst of the crisis is over. It is, perhaps, a bit more measured than that but it does say that while the credit crisis is "proving even more prolonged and difficult than anticipated" there are reasons for optimism.

Prices in some credit markets are now likely to overstate the losses that will ultimately be felt by the financial system and the economy as a whole, it says, as they appear to include large discounts for illiquidity and uncertainty. Conditions should improve as market participants recognise that some assets look cheap relative to credit fundamentals.

According to John Gieve, deputy governor with responsibility for financial stability: The unavoidable correction after the credit boom is proving protracted and difficult. However the pricing of risk in credit markets seems to have swung from being unsustainably low last summer to being temporarily too high relative to fundamentals. So, while there remain downside risks, the most likely path ahead is that confidence and risk appetite will return gradually in the coming months.

The report is here.