Risky investments concern Bank of England

The number of risky investment practices is worrying the Bank of England.

09:55 13 December 2004

The number of risky investment practices is worrying the Bank of England.

While the Bank has said that current investment arrangements are sufficiently robust and low-risk to withstand an economic shock, it highlighted a number of areas of concern in its twice-yearly stability review.

Andrew Large, the Bank's deputy governor, commented: "In the present benign environment, there is a possibility that lenders, borrowers and investors may be inclined to underestimate long-run vulnerabilities and take on too much risk."

In particular, the Bank singled out unsecured lending, commercial property and hedge funds as areas consumers are potentially underestimating future risk.

Despite improvements to credit-scoring models, the rapid growth of unsecured or non-mortgaged borrowing (credit and store cards, hire purchase agreements and overdrafts) in Britain means that many borrowers are now susceptible to an economic downturn.

"It is perhaps significant that some market participants have expressed misgivings at the scale of investor demand for risky and potentially illiquid assets," the review said.

"Unexpected economic developments could trigger the attempted simultaneous unwinding of common positions, possibly leading to strains on market liquidity."