The Bank of England Governor has warned the City that an explosive rise in lax loans and complex debt instruments now represents a major threat to global financial stability.
In a remarkable speech at the Mansion House last night, Mervyn King issued a caution to the corporate debt market, where banks have dramatically loosened their lending conditions and devised ever more advanced means of extending cash to customers.
He singled out collateralised debt obligations (CDOs) as a specific threat, warning those trading in these complex products that they may be dicing with risks "which we do not understand with any great precision".
He said: "The risk of the entire return being wiped out can be much greater than on simpler instruments. Higher returns come at the expense of higher risk."
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Thursday, 21 June 2007
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