The latest edition of the Financial Stability Report notes recent improvements in market sentiment and funding conditions, while noting there are still pressures on funding and that leverage is still high. It moves on to some key policy areas:
- strengthening market discipline: it wants more, and more detailed, disclosures from banks and also favours a risk-based, pre-funded deposit insurance system;
- greater self-insurance by financial institutions: it wants banks to have higher levels of loss-absorbing capital and larger, higherquality liquidity buffers;
- better management of risks between institutions: it feels authorities must have more information on connections between institutions and larger and interconnected banks should have more buffers;
- size and structure of the financial system: it says banks should not be too big or complex as this is not consistent with financial stability. It must be possible to supervise all activities of banks effectively, and the solution may be to limit their business or impose higher capital and liquidity charges on banks that pose the greatest risks; and
- future public support: BoE wants explicit principles for dealing with failing institutions which should not encourage imprudent behaviour from institituions.