The Bank of England published its latest Financial Stability Review. It contains the Bank's regular half-yearly review of risks to financial stability and measures taken to strengthen the financial infrastructure.
The 'search for yield' has continued in various forms in the international financial markets. Strong inflows into hedge funds have continued, and large complex financial institutions (LCFIs) have expanded in businesses such as energy and commodity trading in response to low margins in more traditional market activities. It is significant that some market contacts have expressed misgiving about the present scale of demand for risky and potentially illiquid assets. The risks accompanying any associated concentration of positions and the potential impact on liquidity of an attempt to unwind these positions abruptly could be exacerbated in the event that the current pattern of global financial imbalances triggered any sharp asset price adjustments.
Nevertheless, the profitability of UK-owned banks has improved further, and their capital and liquidity buffers are well in excess of the regulatory minima. There are also few signs of stress in the non-bank financial sector. A significant step towards ensuring the future resilience of the financial system to potential shocks has been the agreement on the new 'Basel II' capital framework, which aligns capital requirements more closely with the risks run by banks. But continuing work is necessary, and under way, to ensure that frameworks for prudential regulation and accounting standards keep pace with financial innovation
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