- 28
- Oct
Regulators and banking institutions across the world needs to reassess the way that financial risk is handled, the Bank of England (BoE) has warned.
In its biannual Financial Stability Report, the group claimed that the recent bust in the credit market had been far sharper than analysts had imagined. It explained that while some parties - including the Bank - had foreseen that the large scale extension of loans and credit to high-risk borrowers could cause problems for banks, investors and consumers, no one had predicted that the problem could grow so big.
And while it noted that central banks around the world have rushed to provide liquidity for lenders who have found their balance sheets dwindle in the recent economic crisis, the BoE went on to claim that in the long term, a “fundamental rethink” was needed to ensure that adequate safeguards are put in to place to stop such a situation arising again.
The group explained that while the loans and cash that was granted to UK banks would help to stabilise the countrys financial system in the near future, as the globe enters an economic downturn financial institutions will need to grow more cautious about how they provide loans, credit cards and other services. As such, the Bank warned that the growth in loans provision is likely to remain subdued over the coming years.
In the report, the group went on to iterate the scale of the recent financial crisis, which saw bank equity prices fall more heavily than was the case following September 11th, as well as the rise in interest rates in America seen in March 1994. Only Black Monday - which occurred in November 1987 - and the banking crisis of September 1974 were said to have had a bigger negative impact equity prices.
Following on from the report, the Council of Mortgages Lenders (CML) highlighted concerns that in the wake of the financial crisis, mortgage assets were being severely undervalued, which could further inhibit the provisions of loans for house purchase in the future.
Michael Coogan, CML director general, exclaimed: “We continue to find it frustrating that in the US, poor credit quality caused the funding crisis, whereas here in the UK the funding crisis has been a major cause of the worsening credit picture. Underlying UK mortgage credit quality has never been the primary issue, yet the reduction in funding to support new lending has had a detrimental impact on the credit quality of existing mortgages, through house price falls, a narrowing of options for borrowers and the prospect of rising unemployment.”
For those who are concerned about their financial security amid falling house prices, tightened credit and heightened risks of redundancy, taking out payment protection insurance may be of interest. Indeed, David Kuo, head of personal finance at independent advice service the Motley Fool, warned earlier this year that taking out such protection could become essential for Britons as loans and credit cards become harder to come by and the economy shrinks.
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