GLOBAL INTERVENTION should steady the banking system but it will also put big constraints on banks, the Bank of England said yesterday, six months after it said it expected confidence to return to financial markets.
In its twice-yearly financial stability report, the bank also said actual losses may be much less than the $2.8 trillion (€2.2 trillion)currently priced into financial markets, reiterating a similar point it made in its April report - before the credit crunch spiralled into the worst financial crisis in memory.
"Exceptional interventions by governments and central banks should help stabilise the banking system in the period ahead," the British central bank said.
"While there are still risks in the wider financial system, the immediate response to the measures has been positive."
The bank's deputy governor John Gieve told the British Bankers' Association the financial crisis was not over, and international authorities needed to be ready to act again if necessary.
His speech made no direct reference to the outlook for monetary policy, but most analysts expect the bank to cut interest rates sharply over the next few months, starting with another 50 basis point cut to 4 per cent in November.
"Authorities worldwide need to remain vigilant and to be ready to step in again if necessary," said Mr Gieve.
In its April stability report, the central bank gave a fairly upbeat assessment of how severely the credit crunch would impact markets and the wider economy, but its latest report is more cautious.
"The instability of the global financial system in recent weeks has been the most severe in living memory," Mr Gieve said in a statement alongside the October report.
"And with a global economic downturn under way, the financial system remains under strain.
"We need a fundamental rethink of how to manage systemic risk internationally. We 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."
Central banks and governments globally have made as much as £5 trillion available in support funding since April, but that level of help will have consequences, the bank said.
"Reducing reliance on the official sector as a source of funds is likely to be a significant constraint on banks' activities over the medium term," it said.
Banks will also need to lower their exposure to short-term wholesale funding and their leverage to improve the quality of their balance sheets, the central bank said.
"Both are consistent with a period of tighter credit conditions for the real economy, compared to the period prior to the turmoil," it said. - (Reuters)
