The recent turmoil in the financial markets may not yet be over, the Bank of England has warned. In a report today the central bank stresses that the prospect of further fallout from the global credit crunch that has shaken leading economies remains a possibility.
Bank of England officials warn that while there have been signs of a recovery in some financial markets, tighter lending conditions should be expected in the coming months - with higher-risk borrowers expected to be particularly affected by the credit squeeze. The report also warns that share prices could again slide after recent gains, as the extent of problems in the credit markets continue to emerge.
Share prices across the world experienced a period of turbulence this summer due to trader fears that rising default levels in the US sub-prime mortgage market could prompt a credit crisis which would impact upon the world's leading economies.
Banks have become increasingly reluctant to lend money to each other on the wholesale markets as a result of the problems in the US housing market, amid uncertainty about the extent to which they are exposed to bad debts in the sub-prime sector.
The specialist market provides home-loans to those on low incomes or with poor credit ratings. Northern Rock has been among the casualties from the resulting credit squeeze.
The Newcastle-based lender found itself at the centre of the first run on a British bank in almost 150 years last month when it emerged that it had borrowed emergency cash from the Bank of England due to liquidity problems.
In its report the Bank of England stresses that the resilience of the UK and international financial system has been "severely tested" by events over the past few months, but warns that major economies remain "vulnerable" to further adjustments in the short-term as a result of the turmoil in the credit markets.
Stressing that both companies and individual borrowers could face increased difficulty borrowing money, the report also warns that the commercial real estate sector could be hit by tighter lending conditions. John Gieve, the Bank of England's deputy governor for financial stability, said: "There have been signs of recovery in recent weeks but some markets are still illiquid and the financial system remains vulnerable to further shocks."
He added that "important lessons" needed to be learnt by both financial institutions and the UK authorities about liquidity risk management and crisis management in the wake of the credit crisis.