BoE report warns of further financial shocks

by Gill Montia

Story link: BoE report warns of further financial shocks

The Bank of England has published its Financial Stability Report in which it describes the US sub-prime mortgage crisis and ensuing global credit shortage as creating “the most severe challenge to the UK financial system for several decades”.

The report outlines events which began with homeowners in US suburbs struggling to pay their mortgages and goes on to describe the way in which investors that had bought sub-prime mortgages saw their asset-backed securities fall dramatically in value.

As a result, financiers wary of the extent of the problem curbed lending, and at this point bank’s like Northern Rock were in serious trouble because they fund their business by borrowing from other banks, rather than relying on their own depositors.

Looking to the future, the Bank of England warns that the UK is vulnerable to further financial shocks that could affect both businesses and households that rely on borrowing.

It sees potential problems in the UK commercial property market where price increases are slowing and there are a large number of projects underway.

This could result in a glut of commercial accommodation and the situation could be exacerbated by tougher lending criteria among commercial financiers.

In outlining the lessons to be learnt from the events of the past few months, the report states that banks need to improve their liquidity management and investors need to ensure that they have full understanding of complex structured financial products.

At the same time, consumers need to know that the money they save with banks is backed by a guarantee scheme.