Friday, December 17, 2010
Bank warns of eurozone and other dangers
Posted by David Smith at 09:15 AM
Category: Thoughts and responses

The Bank of England, famously, did not pay enough attention to its own twice-yearly Financial Stability Report ahead of the crisis. There's no danger of that happening again, is there? In its latest report, the Bank is worried about eurozone contagion affecting Britain and about the return of the "search for yield" that proved so damaging.

This is a summary: "Since June sovereign and banking system concerns have re-emerged in parts of Europe. The IMF and European authorities proposed a substantial package of support for Ireland. But market concerns spilled over to several other European countries. At the time of writing, contagion to the largest European banking systems has been limited.

"In this environment, it is important that resilience among UK banks has improved over the past year, including progress on refinancing debt and on raising capital buffers. But the United Kingdom is only partially insulated given the interconnectedness of European financial systems and the importance of their stability to global capital markets.

"The Report also says that more medium-term risks are posed by a redistribution of capital within the financial system. Capital has flowed into safe assets and, despite recent increases, bond yields remain low in many advanced economies. There are some signs of this intensifying a search for yield, including into emerging market assets.

"Low yields may also be masking latent distress among some overextended borrowers, including some households, corporates and sovereigns. Against that backdrop, it is in banks’ collective interest to build resilience gradually through retention of earnings, which would be boosted if banks restrain distribution of profits to equity holders and staff."

The report is here.