Bank of England outlines risks to economy (AP)

LONDON – The Bank of England warned Friday that Britain is only “partially insulated” from the European financial crisis, and cautioned that a redistribution of capital poses a medium-term risk.

The central bank said in its half-yearly Financial Stability Report that a redistribution of global capital increases the risk of overheating in some emerging market economies.

“Capital has flowed into safe assets and, despite recent increases, bond yields remain low in many advanced economies,” the bank said.

“There are some signs of this intensifying a search for yield, including into emerging market assets,” it added. “Low yields may also be masking latent distress among some overextended borrowers, including some households, corporates and sovereigns.”

The bank called for commercial banks to build resilience gradually through retention of earnings, which would be boosted if banks restrain distribution of profits to equity holders and staff.

British banks’ holdings of sovereign debt issued by countries under heightened strain are relatively small. But total claims on these economies, including lending to households and businesses, are larger.

“Losses on such lending could increase were heightened sovereign concerns to be accompanied by weakening economic conditions,” the report said. “Credit risk could also be amplified by the interconnectedness of European banking systems.”

British banks have claims of almost 300 billion pounds ($470 billion) on France and Germany, whose banking systems are more heavily exposed to the most affected economies.

The European Central Bank said Thursday that it will almost double its capital base to euro10.76 billion ($14.3 billion) — money that will buttress its efforts to contain the continent’s government debt crisis.

The bank, the monetary authority for the 16-nation eurozone, said that its euro5 billion increase from eurozone national central banks would take effect on Dec. 29. It comes as the ECB has been playing a key role in Europe’s efforts to ease debt market turmoil by buying government bonds.

By buying the bonds, the ECB has helped calm market turmoil that was threatening to spread from bailed-out Ireland and Greece to other financially weak countries such as Spain and Portugal. The purchases have driven down interest yields that threatened to go so high weak governments could no longer borrow.

The Bank of England added that a search for yield could lead to overheating in some relatively small markets that are experiencing increasing capital inflows.

“To date, pressure has been most acute in parts of Asia, where property prices have increased sharply,” the report said. “This presents heightened risks to banks operating in the region, including some U.K. banks with growing exposures.”

This news, Bank of England outlines risks to economy
extract from US Economy

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