Economic News

LONDON (ShareCast) - Britain's beleaguered banks are in a healthier condition than six months ago but are still vulnerable to more economic shocks, the Bank of England said in its latest Financial Stability Report.

"Banks in the United Kingdom and internationally will remain sensitive to further shocks for some time. And if economic recovery were to stall as a result of weak bank lending, losses on assets could rise, further affecting confidence in the banking sector," the Bank said.

The Bank is worried about the impact of futher falls in asset prices, especially in commercial property. Raising money had become easier, it said, and banks have benefited from rising asset prices over the past three months, but are still heavily indebted and lack secure long-term funding, it added.

"While pressures on the major global banks have stabilised over the past few months, their balance sheets remain impaired. Banks' leverage remains high, with the possibility of further impairment of assets placing continued pressure on profitability and capital ratios. Future revenue generation will need to balance the desire to deleverage with the need to generate new business at profitable spreads," it said.

"At the same time, the major UK banks maintain a high and rising customer funding gap. The withdrawal of overseas funding and competition for domestic deposits has added to these funding pressures."

Bank Governor Mervyn King also spelt out his ideas for regulation, which included a plan for banks that are deemed "to big to fail," a policy that has put him at odds with both the Chancellor, Alistair Darling, and the FSA.

The Bank's governor claimed earlier this week that he had been excluded from discussions about the contents of a new white paper on financial regulation expected to be unveiled by the Treasury next week.

"Regulators should ensure that banks' resilience is commensurate with the costs that failure could impose on the financial system as a whole. This would mark a step change from the current approach, which has been largely orientated towards protecting depositors," the report said.