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BoE warns risks remain despite progress on economy

BoE warns risks remain despite progress on economy

The Bank of England warned Tuesday that adverse developments in emerging market economies could put fresh strains on financial systems in developed countries and that hedge funds remain particularly exposed to global troubles.
In a cautiously positive biannual report on "financial stability," the central bank said that bank credit risks have fallen and money market pressures have eased since banking bailouts across Europe and the United States earlier this month.
However, it added that risks remain in the broader financial system, including the impact of emerging market economies and the possibility that hedge funds could be forced to liquidate asset holdings due to tighter credit conditions.
"Recently, hedge funds have also experienced additional funding pressures due to redemption requests and a risk is that these could increase," the bank said, noting that hedge funds and one of their worst quarters on record in the third quarter of 2008, losing a little over 10 percent on average.
The bank said that the crisis in Iceland, where the government has nationalized the three major banks, illustrated the dangers of extreme reliance on external funding.
It noted that some banking systems in central and eastern Europe are also reliant from financing from international wholesale markets and foreign parent banks, although not to the same degree as Iceland.
"As well as the risks to these countries, adverse developments in emerging market economies could put fresh strains on financial systems in developed countries," the report said. "For example, large banks in developed economies with international operations could be exposed to significant credit losses."
Unlike the bank's first stability report this year, released in May, there are no "traffic light" boxes warning of coming dangers, indicating that the crisis is already well under way.
The report, which is sent to every non-executive of every bank in Britain, the rating agencies and banking analysts, also calls for the introduction in the longer-term of counter-cyclical measures to iron out wild swings in markets and economies.
Bank of England deputy governor John Gieve said that there was a need to establish stronger restraints on the build-up of risks in the financial system over the cycle with the dangers they bring to the wider economy.
"That means not just increasing capital and liquidity requirements for individual institutions but relating them to the cyclical growth of risk in the system more broadly," he said. "Counter cyclical policy of that sort should complement regulation of companies and broader macroeconomic policy."


Updated : 2021-04-14 10:52 GMT+08:00