Banks must extend the maturity of their funding and refinance substantial sums if they are to avoid a ‘less rapid than expected’ recovery, according to the Bank of England.

In its half yearly financial stability report, the Old Lady of Threadneedle Street warned that banks will still need a considerable amount of time to adjust after such a long period of exuberance.

In the report, the Financial Stability Board noted, ‘It is inevitable that some banks around the world [still] have overstretched balance sheets. They will take time to adjust, and in the meantime, remain vulnerable to the risk of less rapid than expected economic recovery.

‘Around the world, a number of borrowers, including in the commercial property sector, have large refinancing needs in the coming years. And while funding costs remain low, there is some risk of market participants accumulating excessively risky positions, which could unwind abruptly when yield curves eventually rise.’

The Financial Stability Board – which comprises Mervyn King, Paul Tucker, Andrew Bailey, Charles Bean, Spencer Dale, Paul Fisher and Andrew Haldane – said the banks still must do a lot more if they are going to remain secure in 2010.

‘While their profitability is relatively buoyant and market conditions broadly favourable, banks should take opportunities to strengthen their balance sheets, including by not distributing an excessive amount of profit.

‘That will reduce the risk of disruption to the flow of credit in the future,’ the Board added.