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Gold News & Press Comments

Bank of England Risk Warning

The Times July 12, 2006
Bank of England gives City a warning on risk
By Gary Duncan, Economics Editor

The Bank of England today warns Britain's big commercial banks and other City institutions against piling up excessive risks that could leave them dangerously exposed if financial or economic conditions worsen severely.
In particular, the Bank sounds an alert to City institutions to beware of dangers that pressure to keep up with competing institutions' profitability and market shares could tempt them into taking higher risks than is prudent.
In its twice-yearly Financial Stability Report, the Bank concludes that strong economic and market conditions, and intense competitive pressures have encouraged financial firms to extend their risk-taking.
It says: This has pushed the financial system as a whole further up the risk spectrum.
While the Bank concedes that high risk-taking is normal at the present stage of the business cycle, it cautions institutions that past experience shows it carries risks if conditions turn.
The Bank gives a blunt warning to managements not to vie with industry competitors at the expense of prudent strategy. The report frets about the weight given by some groups to the business risks from a more cautious approach that may not only reduce profitability in the short run, but may also risk losing market share . . . It says: These concerns often seem to have outweighed the risks to balance sheets associated with potentially overpriced assets.
The sharp falls in equity prices in May and June are best seen as a healthy correction that has led to some paring back of risk-taking in the City, the Bank concludes.
However, today's report also expresses concern that with institutions having largely weathered the market turmoil of the past two months, they may also be lured into the conclusion that there is little need to re-examine their approach to risk-taking. It notes that previous bouts of short-lived turbulence have encouraged a return to the risk-seeking environment seen earlier. The Bank says that whether this has happened again now remains an open question.
Overall, the report finds that the UK financial system is still highly resilient to potential shocks. However, it argues that the system's vulnerability to dangers from risk-taking behaviour and increased corporate borrowing, and from very high household debt, has worsened a little over the past six months.
Increased exposure to complex financial instruments that could prove to be illiquid is also highlighted as one mechanism through which the impact of any severe blows to the system might be amplified, were institutions simultaneously to dash for an exit from investments for which there is limited demand.

Bank of England Says Investors May Still Need to Rethink Risk
July 12 (Bloomberg)

U.K. banks may be taking on too much risk in the search for higher investment returns, making the country's financial system more vulnerable to a crisis, the Bank of England said.
Many investors haven't reconsidered their positions after the 9 percent decline in the U.K.'s benchmark FTSE 100 stock index and drops in asset prices in emerging markets such as India in May and June, the bank said, prompting it to warn against complacency.
``The Bank's market intelligence indicates that market events during May and June may have checked risk appetite, at least among some institutions,'' the Bank of England said today in its semi-annual Financial Stability Report. Still, ``the evidence does not suggest a fundamental rethink of risk preference and risk strategies by financial markets.''
The bank said emerging market debt spreads have risen on average by 50 basis points and sub-investment grade corporate bond spreads by 30 basis points from lows. Some borrowers, like Turkey, have seen their sovereign bond spreads widen 150 basis points since the end of April. A basis point is 0.01 percentage point.
Global equities have fallen around 10 percent from a peak on May 9 to June 26, according to the MSCI world equity index.
Still, emerging market and sub-investment corporate bond spreads are lower than at the time of the last bank report in December, and equity prices ``are substantially higher than their trough in 2002.''
`Optimistic Expectations'
Current levels of asset prices ``appear still to be based on optimistic expectations about future risks and uncertainties, including about the macroeconomic outlook,'' the bank said.
``In the event of a sharp fall in asset prices, some of the underlying vulnerabilities in the balance sheets of corporates, households and, ultimately, financial institutions could be exposed,'' the bank said.
Global economic imbalances, high household debt and the increasing importance of bigger banks are all possible threats to financial stability, the bank said.
Even so, these risks are unlikely to take shape and upset the financial system, which has become more resilient over the past few years.
The bank recommended that companies improve risk management and that governments and central banks develop contingency plans to deal with crises.

A Good Case for Buying Gold?
It looks to us that many of the predictions forecast in Wake Up are now happening.

Lowest Recent Gold Price

Bull Market?
Does the drop after this price peak mean an end to the gold bull market, we believe not, more of a correction.

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