30 June 2009

Bank of England Bi-annual Financial Stability Report

The Report assessess the current state of the financial system. It discusses ways to strengthen the system, given that market sentiment has improved recently, along with the perceptions of the bank's resilience.  

The Report discusses five broad areas where policy changes are needed:

• Strengthening market discipline. Richer and more frequent public disclosures by banks are required.
• Greater self-insurance by financial institutions. Institutions’ own resources should be the first line of defence against financial pressures
• Improved management of risks arising from interactions among financial institutions. The authorities need better information on connections between institutions. To prevent the build-up of financial imbalances, countercyclical instruments are needed.
• Size and structure of the financial system compatible with maintaining financial stability. Banks should not be too big or complex. Possible measures could include limiting the scope of banks’ businesses to a narrower range of relatively low-risk activities, or imposing higher capital and liquidity charges on institutions that pose greater risks to the economy or taxpayer in the event of failure.
• Principles for future support from public authorities. When in future self protection fails, interventions to contain crises should be guided by explicit principles to ensure that they do not encourage imprudent behaviour by financial institutions and minimise risks to the public finances.

© Bank of England