RTTNews - Funding conditions in the U.K. have improved slightly, but banks continued to be inevitably vulnerable to further economic storms, the Bank of England said Friday.

In its latest bi-annual Financial Stability Report, the BoE said, Banks in the U.K. and internationally remain sensitive to further adverse economic or financial sector developments, which could in turn affect economic recovery and flow back to the banking system.

The BoE said 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.

On Wednesday, BoE Governor, Mervyn King had said problems in the banking sector may lead to a long, hard slog recovery for the British economy. He also said he is more concerned now than ever and the pattern of the current recession is not seen since the 1930s.

In the report, the BoE also proposed a raft of measures to make financial regulation strict. The BoE said increased and more frequent public disclosures by banks are needed to control risk-taking. In addition, the central bank said lenders should use own resources as the first line of defence against financial pressures. The self-insurance will require higher levels of loss-absorbing bank capital and larger, high-quality liquidity buffers.

Further, the Bank said lenders must reduce their reliance on ratings agencies as over-reliance can cause lenders to hold insufficient capital. Also, credit rating agencies' methodologies and models can fail to reflect credit risk accurately.

With regard to bank losses, the BoE said, Banks' balance sheets remain sensitive to any setbacks in recovery in financial markets or real activity. The economic downturn is still perceived by market participants as the highest risk to financial stability.

The report carried results of a survey conducted among market participants in May, which showed that only 15% of respondents are very confident about the financial over the next three years. That was down from 36% recorded last summer. At the same time, there was an increase in those who were not very confident, to 18% from 3%.

The BoE said, While pressures on the major global banks have stabilized 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.

Commenting on the report, BoE's Deputy Governor for financial stability, Paul Tucker said, Greater resilience will need to be based on a variety of measures, some of which are discussed in this report as a contribution to the wider national and international debate.

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