UK banks have overstated sub-prime related losses, which is likely to delay any improvements in confidence levels in financial markets, the Bank of England (BoE) said in its Financial Stability Report released overnight.
While an adjustment in the price and quantity of risk-taking was clearly needed following the credit boom, the Bank believes estimates implied by prices in some credit markets are overstating the losses that will ultimately be felt by the financial system as they “appear to include unusually large discounts for illiquidity and uncertainty”.
In effect, the BoE said that risk premia in markets had swung from being “unusually low to temporarily too high” which could be contributing to a delay in the return of confidence and risk-taking.
The Bank said actions were needed to bolster confidence and urged banks to contribute through more informative disclosures and by raising capital as a signal of strength.
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