Bank of England Cites Euro Crisis, Bank Stress as Financial Risks

The Bank of England has issued a report citing bank stress and the euro sovereign debt crisis as the biggest short-term threats to global financial stability.

As the conversation about the long-term risks posed by fragmentation of data and CCP allocation in the U.S. market heats up, the Bank of England’s monthly Financial Stability Report should also refocus concerns on banks’ stress and the crisis in the euro zone.

The report, though, is not wholly negative.

“The outlook for financial stability has improved a little since the previous Report,” the report states. There are, however, still reasons for worry:

UK banks remain highly sensitive to developments in the euro area. There are some signs of overvaluation of assets on UK banks’ balance sheets. Prospects for building capital through retained earnings appear generally limited and capital issuance has been weak. This could undermine banks’ capacity to supply credit effectively, which may aggravate credit risks currently contained by forbearance.

Bank of England Report: Bank Stress

According to the report, some aspects of bank resilience in the UK has improved, but “the pace of this improvement has generally slowed.” The reason for this decreasing rate of bank stress improvement is that capital levels increased and risk-weighted assets decreased. Leverage, the report states, “has not fallen significantly since 2009.”

Compounding the problem, poor prospects for future profitability of UK Banks is hampering financial stability. Forecasts of returns on equity have been revised down, and total revenues have fallen consistently since 2010.

Bank of England Report: Risks from the Euro Zone

“Despite recent policy actions,” the report says, “the euro-area sovereign debt crisis remains the most immediate and material risk to financial stability.”

The running list of “triggers” that could escalate risk includes forecasts for Greek public debt outturns, which have only grown worse since the IMF programme of 2010, as well as “social unrest” in Greece and in “vulnerable euro-areas.”

Read the report here.

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