On Friday, June 26, 2009, the Bank of England published its bi-annual Financial Stability Report [http://www.bankofengland.co.uk/publications/fsr/2009/fsr25.htm]. The Report noted that although financial support was needed from governments in the early part of 2009, the global financial system appears to be strengthening. Government actions such as additional liquidity insurance, additional capital investment, and direct lending to banks have helped to stabilize the market in recent months. As the value of government support in North America and Europe reached 50% of those economies' gross domestic product, equity markets have risen by 25%-35% from their low points in March, and a strengthening of the credit markets has recovered approximately another $2 trillion of mark-to-market losses. Improvement in market perception is both signaled and benefitted by increased private support, such as conversions of preferred shares to common equity, conversions of subordinated debt into equity, and direct forms of shared investments between private and government investors. Bank balance sheets, however, "internationally remain weak," which could be a big risk if the financial system were to undergo another big shock. Banks remain highly leveraged, tying their net worth to "changes in sentiment about asset values." Cross-border funding is another at-risk area, as "rising sovereign and cross-border risks" could cause "further disruption to funding markets."
For a brief overview of the Bank of England's Financial Stability Report, see http://www.bankofengland.co.uk/publications/fsr/2009/fsroverview0906.pdf.