Bank

Bank calms credit concerns

Bank calms credit concerns

Banks are needlessly fuelling financial uncertainty through their reluctance to take on risk by extending credit, the Bank of England has said.

Its financial stability report, published today, says the perception of risk is now overstated.

“Elevated” risk for a prolonged period could have a negative impact on banks’ profitability, capital and funding, the report notes.

It says this could potentially lead to a “more severe tightening of credit conditions in the wider economy”.

As long as financial institutions overrate risk and refuse to lend, the markets will not be able to return to normal, “undermining confidence and potentially setting in train a further adverse cycle,” the Bank added in its report.

It said its special liquidity scheme, which allows banks to swap mortgage-backed assets for government bonds, should help the market to recover.

But it also listed several measures it wants banks to take to restore confidence in the system.

Higher capital buffers to improve confidence, raising capital through rights issues and attracting investment are recommended as better tactics than reducing lending growth, the central bank said.

It also backed better and more frequent disclosure of banks’ financial positions to improve confidence.

Some in the City have suggested the Bank’s estimate is a little over-optimistic, however.

Steven Bell, chief economist at hedge fund GLC, told the Today programme it was difficult to be confident with US forecasts remaining gloomy.

“All the Bank of England has done is reflect what the market has done in the last few weeks,” he said.

“My own view is things are actually going to get worse; they are not going to get better.”