BoE sceptical over scale of sub-prime losses
Banks may be overestimating the scale of losses by more than half, the Bank of England suggested today, adding this could hurt any recovery from the current financial crisis.
Estimates of the losses on the banking sector's exposure to sub-prime mortgages have ranged from $400bn to $1trn, suggested by the IMF, but the Bank of England's latest Financial Stability Report cast doubt on the accuracy of some of these.
"All of them are potentially significant overestimates of the losses within the wider economy associated with the financial market crisis," the Bank of England said, adding it estimates actual losses could be closer to $170bn.
"Using a market-to-market approach to value illiquid securities could significantly exaggerate the scale of losses that financial institutions might ultimately occur. It will exaggerate to an even greater extent the potential damage to the real economy," the Report said.
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"While there remain downside risks, the most likely path ahead is that confidence and risk appetite will return gradually in the coming months," deputy governor John Gieve added.
His comments are being interpreted by some economists as a sign that future interest rate cuts may not be a deep as expected and that there may be no change in the current 5% UK base rate at next week's Monetary Policy Committee meeting.
The Bank of England has been criticised for its response to the credit crisis compared with the US Federal Reserve, which has cut interest rates seven time and pumped hundreds of billions of dollars into the US economy. Last night the Fed cut US rates to 2%.
The UK central bank launched its own rescue package two weeks with a deal for mortgage lenders to swap between £50-100bn worth of mortgages for more tradeable UK government bonds.
