LONDON, (Reuters) – The high valuation of financial assets may be corrected if investors reassess their prospects of recovery following COVID-19. There are also signs of an increase in risk taking at investment banks.

After its October meeting, the BoE’s Financial Policy Committee stated in a statement that there were still signs of increased risk taking in some financial markets relative to historical levels.

Investors bet on strong recovery from the pandemic and stock indexes have reached new highs. But inflation has increased in recent months. Growth has also become more uneventful due to the supply side bottlenecks.

The rise in energy costs has impacted the purchasing power of households in Britain and elsewhere.

“Asset valuations could correct sharply if, for example, market participants re‐evaluate the prospects for growth, inflation or interest rates,” the statement said.

There are indications of a continued relaxation in the underwriting standards, and an increase in risk taking in certain investment banking companies.

FPC raised concerns about Evergrande Group (one of China’s largest property developers) being able to fulfill its financial obligations.

According to it, “A disorderly default could cause serious damage to China’s property market and have potential consequences for other parts of the world.” However, this year’s Stress Tests by the BoE (Banks) had proven that UK lenders could cope with severe economic downturns in China and Hong Kong as well sharp global asset price adjustments.

The FPC stated that although house prices have increased to levels not seen since the financial crisis a decade ago (which was a record), there is no evidence of an increase in lending standards.

The majority of debt servicing was affordable, the company said.