Today the Bank of England published its bi-annual Financial Stability Report, which assesses financial conditions affecting financial stability and suggests ways to strengthen the financial system. The report states that "the financial system has been significantly more stable over the past six months, underpinned by the authorities’ sustained support for the banking system and monetary policy measures," and that the market rally has "boosted bank profits, lowered concerns about potential future losses, and has enabled banks to raise further external capital." However, the report notes that "after such a prolonged period of exuberance earlier in the decade, it is inevitable that some banks around the world have overstretched balance sheets."
The report warns banks to avoid excessively risky positions, "which could unwind abruptly when yield curves eventually rise," and "to reduce leverage further, extend the maturity of their funding and refinance substantial sums as official sector support is withdrawn."
In the future, the report suggests, financial regulatory policy should place more of an emphasis on systemic risk. Steps should be taken to spread risk across the system, and to limit the impact of financial institution failures.