The repricing of risk has gone too far, the Bank of England suggests in a new report.

The UK’s central bank published the latest version of its Financial Stability Report noting that, after the credit boom, an adjustment was necessary, and bound to have costs, but it is proving even more prolonged and difficult than anticipated.

“Prices in some credit markets are now likely to overstate the losses that will ultimately be felt by the financial system and the economy as a whole, as they appear to include large discounts for illiquidity and uncertainty,” it says. “Conditions should improve as market participants recognise that some assets look cheap relative to credit fundamentals.”

John Gieve, deputy governor for Financial Stability, said, “The unavoidable correction after the credit boom is proving protracted and difficult. However the pricing of risk in credit markets seems to have swung from being unsustainably low last summer to being temporarily too high relative to fundamentals. So, while there remain downside risks, the most likely path ahead is that confidence and risk appetite will return gradually in the coming months.”

“To reinforce those prospects of recovery, we need to restore confidence in the banking system. That is why we have launched the Special Liquidity Scheme and why I welcome the steps taken by some banks to strengthen their capital positions,” he added.