Financial Stability Report from Bank of England

In its Financial Stability Report, the Bank of England said the total losses from the financial crisis reached $15tn (£10tn). This amount is an improvement on the earlier estimate of $25tn. The report highlighted several key findings;

  • The current conditions in the financial system may well be easing.
  • Banks will still face funding problems in future
  • Banks will need to have larger reserves
  • Government should consider limiting size of banks

Now the Bank is calling for further regulation to prevent banks getting too big and tougher controls on lending to prevent similar occurrences in the future. The Governor, Mr Mervyn King would like the Bank of England to have a larger role in any future regulation, and in the Financial Stability Report the Bank details this below.

It would like to see:

  • Strengthened market discipline: Greater disclosure by banks backed by a credible threat that the government will close failing banks
  • Greater self-insurance: Banks required to hold more capital and liquidity reserves, including putting extra money aside in good times
  • Improved management of risk within the financial system as a whole, not just of individual banks
  • Size and structure of banks to be limited
  • Clear principles of public support, avoiding future moral hazard, which encourages banks to take more risks because they know they will be bailed out

The huge losses have made the banks more reluctant to lend therefore such products as invoice finance and asset refinance have become more popular.