BoE report reveals financial sector is strengthening

In its twice-yearly Financial Stability Report, the Bank of England said that over the last six months, the financial sector has become “significantly more stable”.

While the Bank acknowledged that commercial banks still had more to do to improve their long-term stability, action taken to strengthen the sector, such as historically low interest rates and its quantitative easing scheme, had improved the situation.

The report said: “Banks need to reduce leverage further, extend the maturity of their funding and refinance substantial sums as official sector support is withdrawn.”

“While their profitability is relatively buoyant and market conditions are broadly favourable, banks should take the opportunity to do so.”

The report also noted that the main cause of the crisis in the global financial sector over the past year had been “excessive risk-taking in the upswing of the credit cycle and insufficient resilience in the subsequent downturn”.

As a result, it warned that the banks will need more time to recover and they “remain vulnerable to the risk of less than expected economic recovery”.

Separately, at last week’s Pre-Budget Report, UK Chancellor Alistair Darling confirmed there would be a one-off 50% tax on bankers’ bonuses paid above £25,000.

The Chancellor said the banks, rather than the bankers, will pay the tax and the temporary measure will come into effect immediately and will be used to claw back some of the bailout funds used to rescue the banking industry.

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