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Sovereign risk looms large

- Bank of England Financial Stability Report (FSR) highlights three key risks for the financial system:
• "Concerns about the commitment and ability of some European governments to strengthen their balance sheets, potentially leading to a ‘conflagration’."
• "The capacity of the UK banks to refinance or replace close to £800 billion of funding that matures by end of 2012"
• "The risk that banks are forced to adjust to the new regulatory requirements too quickly."
- "The common thread through the whole Report is the outlook for credit supply: the need for supportive lending is deemed to have increased, and the risks of another crunch have escalated."
- "The Bank judges that the resilience of the UK banks has continued to improve: leverage is down, the quality and quantity of capital and liquid assets are up. But problems remain, with pockets of vulnerability in the banking book and profitability likely to be constrained going forward."
RBS UK Economics 20100628

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