[AndrewWoo]

This was released overnight. It acknowledges that structural vulnerabilities in banks' and other sectors' balance sheets remain, and discusses fundamental changes required to improve the resilience of the financial system. While it notes that slowing growth, a fall in property prices and falling risk appetite placed undue pressure on banks' solvency, causing large-scale interventions by the major central banks and up front fiscal outlays through government capital injections, it also notes that historically more than half of government outlays in developed-country banking crises have been recovered. Notably, the BoE estimates that if all the facilities offered by central banks and governments in the UK, US and euro area were fully called on, the total outlay would exceed $14 trillion (c. 50% of these countries' annual GDP); however, it notes that this is highly unlikely. The report also notes that the return of risk appetite, alongside signs that activity is slowing less sharply, suggest "some stabilisation and recovery in global banking prospects". However, it cautions that the banking sector outlook remains uncertain as banks remain leveraged and seek to strengthen capital buffers. Additionally, the BoE noted that the aggregate mark-to-market losses of UK banks had fallen to $15,100bn (from $18,000bn at the last report in October and $25,000bn in March's report).

The Report matters for GBP for several reasons: first, its view of the state of the financial system affects the likely course of monetary policy; second, the financial sector remains key to the UK economy; third, the BoE wants more leverage over the financial system. At present it believes that it has responsibility but not enough power. This could cause tensions between the BoE and the government over future months. Overall, the tone of the Report appears very cautiously optimistic. In many ways, the UK financial system looks in better shape than other countries - especially the Eurozone - and it matters for those currencies as well.