The BoE’s financial stability report released today says that the authorities’ sustained support for the banking system and monetary policy measures have underpinned this recovery.
The Bank says low risk-free interest rates and reduced uncertainty have led to a rebound in a range of asset prices.
The market rally has boosted bank profits, lowered concerns about potential future losses and has enabled banks to raise further external capital.
The report says that while the profitability of banks is relatively buoyant and market conditions broadly favourable, banks should strengthen their balance sheets by not distributing an excessive amount of profit.
It says: “In the medium term, the root causes of this and previous systemic crises must be tackled — excessive risk-taking in the upswing of the credit cycle and insufficient resilience in the subsequent downturn.
“An expectation that ‘too important to fail’ firms will receive public assistance, and that unsecured wholesale creditors will not share losses, has exacerbated both the boom and the bust. That calls for a robust, multi-faceted policy response.
“Regulatory policies should give greater emphasis to systemic risks over the cycle and across institutions, as set out in a recent Bank discussion paper. They should be complemented by structural measures to contain the spread of risk across the system. And because failures of financial institutions cannot and should not be prevented, the resolution framework will need to be improved to limit the impact on the wider economy.”