| Bank of England calls for confidence |
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| Written by Adrie van der Luijt | |
| Thursday, 01 May 2008 | |
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The Bank of England says the worst of the credit crunch is over in its Financial Stability Report.
Rising US sub-prime defaults have triggered a broad-based repricing of risk and deleveraging in credit markets. The Bank says that an adjustment was needed after the credit boom and was bound to have costs, but adds that it is proving even more prolonged and difficult than anticipated. It predicts that 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, 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. With sentiment still weak, however, the Bank has announced a special scheme to improve the liquidity position of the banking system and to increase confidence in financial markets. This report sets out the reasons for the repricing of credit risk and deleveraging being so protracted, why market-based estimates of the costs of the crisis are likely to overstate ultimate losses, prospects for financial stability and measures to help contain the length and costs of the turmoil and to prevent its recurrence. Introducing the report, John Gieve, deputy governor for financial stability, said that the unavoidable correction after the credit boom was proving protracted and difficult. He added that the pricing of risk in credit markets, however, seems to have swung from being unsustainably low last summer to being temporarily too high relative to fundamentals. While there remain downside risks, Gieve explained that the most likely path ahead was that confidence and risk appetite will return gradually in the coming months. “To reinforce those prospects of recovery, we need to restore confidence in the banking system. That is why we have launched the Special Liquidity Scheme and why I welcome the steps taken by some banks to strengthen their capital positions,” Gieve concluded. Related articles
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