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BoE's Gieve-markets May be Underestimating Risk

Financial markets may not be properly pricing in risks, Bank of England Deputy Governor John Gieve warned on Thursday.

In a speech that contained little information about the immediate monetary policy outlook, Gieve said that the near-term risks to Britain's financial stability were low.

"That is mainly a reflection of the continuation of broadly benign macroeconomic conditions in the UK and globally," he said, according to the text of his remarks.

"A rebalancing in global sources of growth does appear to be under way - and we are watching developments in the U.S. economy and movements in the U.S. dollar closely."

But Gieve said that while overall conditions were benign, financial firms may be underestimating possible dangers in their search for profit.

"There is no denying that financial markets are liable to overshoot. And it is particularly important to stay alive to this risk when new records are being set for leveraged bids, returns on equity and City bonuses," he said.

"I do think it is important that market participants recognise that risk has not gone away, and that there are limits in the ability of financial engineering to insulate the financial system in aggregate against risk."