By Jamie McGeever
LONDON, June 29 (Reuters) - Policymakers have had some success in stemming the credit crisis but it may take some time before confidence in the financial system is fully restored, the Bank for International Settlements said on Monday.
Despite widespread signs of improvement in the financial markets, some closely watched money market, yield and credit spreads are much wider than they were before the crisis blew up in August 2007 and also remain wide by historical standards.
"Unprecedented policy action had managed to halt the financial crisis, but normalisation was bound to be a protracted process," the BIS said.
"With a sustained recovery unlikely to take place without a lasting stabilisation of the financial sector, questions remained about how effective past and future policy measures would be in maintaining the improved tone in markets."
In its 79th annual report, the BIS split the near-two-year crisis into five segments, the most serious triggered by the collapse of Lehman Brothers in September and the most recent, since mid-March, showing "first signs" of stabilisation despite a negative economic and financial outlook.
"A key factor behind improving asset valuations was the confidence effect from announcements by major central banks of expansions of both the range and the amount of assets that they would be prepared to purchase outright," the BIS said.
Pledges from the Group of 20 to provide further stimulus into the global economy and "robust" first quarter earnings from major banks and corporates also helped improve sentiment, but "market conditions continued to be fragile."
Credit spreads, while down "substantially" from their post-Lehman peaks, still reflect expectations of high default rates and losses on bond and loan portfolios.
Credit quality is likely to deteriorate further because economies are mired in recession, but "forward CDS (credit default swap) spreads suggested that risk premia were expected to revert to more normal levels over the medium term," the BIS said.