Britain’s financial system faces the possibility of further instability, with the health of insurers and hedge funds among the current areas of concern, the Bank of England warned today.
In its twice-yearly Financial Stability Report, the central bank talked not only of significant risks remaining for the banking system – in spite of the £50bn bail-out that in recent weeks has shown signs of bringing some stability – but also highlighted other potential worries.
The report followed another day in which sterling, undermined by the weak economic outlook, slid further on foreign exchange markets, falling by more than 2% against the yen to Y144.4 and by 1.7% against the dollar to $1.5473.
Describing the instability in the global financial system as 'the most severe in living memory', Sir John Gieve, deputy governor for financial stability, said: 'With a global economic downturn under way, the financial system remains under strain.'
Looking beyond the banks to other risks, the report said: 'One risk is that leveraged investors, like hedge funds, may be forced to liquidate asset holdings due to tight credit conditions.' It added that hedge funds had faced 'additional funding pressures due to redemption requests and a risk is that these could increase'.
Meanwhile, insurance companies, while not over-leveraged, offered other potential problems, not least if their investments fell below capital adequacy rules.