Bank of England warns of risks

In particular, it raises concerns about the financial health of the life-insurance industry, which it says "has generally been adversely affected by recent equity market weakness".

And it warns that the stock market falls "have also put pressure" on company pensions schemes.

In the longer term, the Bank is also concerned about the record levels of UK household borrowing, both through mortgages and consumer credit.

Cloudy perceptions

The Bank of England's Deputy Governor for Financial Stability, David Clementi, said that the financial system had proved resilient so far.

"But the accounting, transparency and governance issues raised by Enron and some other cases may have clouded market perceptions of corporate prospects," he said.

"Pressures have also arisen on financial intermediaries given weak equity markets.

"In the UK, the banking system remains sound but faces challenges responding prudently to the continuing growth in households' demand for credit," he added.

Lots of risks

The comments come as the Bank of England releases its six-monthly financial stability review, designed to pinpoint problems in the financial system in advance.

The report warns of increased risks in the international economy, with "credit deterioration resulting from the sharp slowdown in growth, weak equity markets, and the single biggest ever corporate and sovereign bankruptcies, Enron and Argentina".

It says that while greater risk diversification and dispersion - where banks sell their risks to someone else -"is important in ameliorating the effect of the shocks, it makes it more difficult to track where risks are ending up".

Wait for recovery

It also warns that some risks will crystallise only after a recovery has started because of increases in interest rates and demand for credit.

Credit problems have intensified for certain corporate sectors, such as telecoms, and there are worries that the Argentine crisis could spread to Brazil, where many UK banks are heavily exposed.

However, the Bank of England reckons that "key indicators of the health of the UK banking system taken as a whole are reassuring.

"Despite rising non-performing loans, the profitability of internationally active banks has not been seriously impaired, thanks in part to the robustness of non-interest income."