Bank of England is concerned about increasing debt |
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Fri, 16 Dec 2005 10:15
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LONDON: Bank of England is worried about the increasing debt, which it sees as the biggest long-term threat to the British financial system. In its semi-annual Financial Stability Review, the central bank said the heavy debt burden carried by many borrowers and the aggressive search for better returns posed threats to the system.
There is a demand for highly-leveraged financial products, especially since June and there is evidence to show that the financial discipline may have weakened, the bank said pointing out relaxation in lending criteria in some markets and increased demand for illiquid instruments.
The bank's deputy governor in charge of financial stability Andrew Large said experience from the past shows that such behaviour in stable times can create problems later. "'No doubt risk management has improved and risks are more widely dispersed. But I believe that vigilance is still called for," he said.
| The report said the growth in the derivatives market and investors' aggressive search for yield pose risks to lenders. Competition among lenders leads to relaxation in the terms and conditions in lending.
The central bank, in a report published in mid-November, had revealed that the amount of derivatives traded outside exchanges grew to a record $270 trillion in the first half of the year, up 59 per cent since 2003.
Large, however, added that overall the financial system remains healthy and near-term risks appear limited. But there are issues of potential concern for the long run. The financial environment is now more complex, opaque, interconnected and leveraged, so a wholly benign outcome may not be a foregone conclusion.
The report said the U.K. banks remain well capitalized and capable of withstanding significant adverse shocks to their balance sheets. "Nevertheless, in the longer term, some significant downside risks remain,'' the bank said.
The bank is particularly concerned about the reckless lending by banks to commercial property and private equity industries and an unhealthy appetite for riskier investments by borrowers.
The bank feels mortgage lending in the country is not excessive and presents little danger to the financial system, especially in a more stabilised housing market.
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