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Financial policy committee to warn of effects of worsening eurozone crisis

Guardian of financial stability also expected to point to tensions in money markets as a threat to confidence

The government’s new guardian of financial stability is expected to warn that the eurozone crisis is the main threat to confidence as it gives its quarterly update on the health of the financial system on Wednesday.

After its first meeting, in June, the financial policy committee (FPC) warned that the eurozone crisis was the “most serious and immediate” threat to the banking system but also highlighted concerns that banks might be hiding the extent of their losses on bad loans.

Three months on, the FPC is expected to acknowledge that the eurozone crisis has now worsened and try to assess the impact of falling stock markets on financial stability.

Jonathan Loynes, chief European economist at Capital Economics, also expects the FPC to point out the tensions in the money markets. “There are some indications of a credit crunch starting to re-emerge, with interest rates starting to creep up and commercial banks borrowing from central banks,” said Loynes.

Sir Mervyn King, the Bank of England governor, who chairs the FPC, last time called on banks to bolster their capital rather than pay dividends.

Since then, Andy Haldane, executive director for financial stability at the Bank and an FPC member, has warned that there might be a need to mitigate the “fear factor” in the markets.

“If risk is overpriced, and agents over-pessimistic, communicating that might help in correcting overshoots in risk appetite… A more optimistic popular narrative might have a role to play in helping correct today’s market pessimism,” Haldane said.

The FPC’s quarterly update – due on Wednesday – follows warnings from the International Monetary Fund last week that risks in the financial system were increasing. The Washington-based fund, which wants eurozone banks to be recapitalised, said: “We are back in the danger zone.” © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds