BoE: Rethink needed to avoid a repeat of crisis

The Bank of England’s twice-yearly Financial Stability Report has been published and has revealed that tougher regulation and constraints on lending are required in order to safeguard against future risk.

Looking at the longer-term credit crunch issues, according to the Bank of England, banks would need to increase their deposit bases to make them less reliant on wholesale funding and would need to hold a larger buffer of liquid assets.

According to the Bank, a recession as severe as that of the early 1990s would result in credit losses of £130 billion for Britain’s six largest banks and could wipe out the entire government-backed funding rescue package.

The Bank unveiled that the turmoil in the markets over the last few weeks has left the world’s financial institutions with losses of $2.8 trillion, while UK losses have almost doubled to £122.6 billion from £62.7 billion.

As a result, the Bank is calling for a fundamental rethink after last week Governor, Mervyn King, said not since the start of World War I had the banking system been so close to collapse.

Recent UK bank bailouts include £20 billion injected into Royal Bank of Scotland and a further £17 billion pumped into Lloyds TSB and HBOS.

In its report, the Bank said that the initial response to the rescue package was encouraging but Sir John Gieve, the Bank’s deputy governor for financial stability, said the financial system remains under strain.

In London, the FTSE 100 has suffered over recent weeks with banks leading the falls.

Across the world, other countries continue to suffer after the International Monetary Fund (IMF) has loaned the Ukraine emergency funds to the tune of $16.5 billion.

This follows Iceland, Pakistan and Hungary who have asked for billions of dollars in emergency loans from the IMF to help repay debt and Belarus are likely to follow suit this week.

In related news, the US Federal Reserve is expected to lower interest rates later this week, which will take the rate to 1% - the lowest level since 2001. As a result, this is expected to lead European banks to introduce further cuts, according to analysts.

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