Recent policy moves have helped narrow some credit market spreads, but systemic concerns continue to dog financial markets, says BCA Research.

“The list of monetary and fiscal action taken in support of credit markets in recent weeks has been impressive,” BCA says in a research note. It points out that, in addition to an aggressive rate cut last week, the U.S. Federal Reserve Board has extended its “lender of last resort” services to broker/dealers, expanded the list of allowable collateral, and assumed direct credit risk by backstopping the deal to save Bear Stearns.

In response to these various measures, BCA notes that certain spreads have narrowed. “Nevertheless, solvency issues remain,” it cautions. “While the unorthodox Fed policy adjustments have had some success in treating the symptoms of the credit crunch, more significant directed fiscal policy action is required to deal with the underlying problem: falling house prices.”

“Foreclosures will climb as more homeowners lose their home equity. Subprime-related asset writedowns will continue to erode bank capital and keep upward pressure on interbank lending spreads. Banks will have to rebuild their capital bases over time, which means that deleveraging and forced selling will remain a headwind for the credit markets in the foreseeable future,” BCA concludes.