Financial institutions in the UK fear the risk of a major crisis stands at the highest level since before Lehman Brothers went bust in September 2008, while confidence in the banking system is at the lowest level since the second half of 2009, according to the Bank of England.

The central bank, which is taking on more powers of bank supervision from the Financial Services Authority, the national regulator, said 68 respondents to a survey said the chances of a “high-impact event” in the UK financial system rose sharply in the second half of 2011 to be at the highest since July 2008. On a short-term (0-12 months) view, 54 per cent of respondents said the risk of a high-impact event was high or very high, while 43 per cent thought there was a medium-size risk; only 3 per cent said it was very low.

With debt problems threatening to tear the eurozone apart, coupled with wrangles in the US over cutting budget deficits, and even concerns emerging about the durability of the Chinese economic miracle, investors are nervous.

Asked to identify the five risks that would be most difficult for institutions to manage, the dangers of trouble with sovereign debt – such as default – was the biggest worry, with 68 per cent of respondents giving this their biggest risk; 38 per cent of those surveyed said the risk of an economic downturn would create the most problems, followed by funding risk (35 per cent), regulation/tax risks (31 per cent), and risk of financial institution failure/distress (21 per cent).

The Bank of England’s Systemic Risk Survey, published twice a year, was carried out between 20 September and 21 October. Respondents to the survey were composed of hedge funds, banks, building societies, asset managers, insurers and other institutions.

Asked about the probability of a high-impact event in the UK in the very short-term, some 18 per cent said it was “very high”, compared with none taking such a view in the first six months of last year. As for the medium term, 16 per cent of respondents said a high-impact event was highly likely, up from 9 per cent.

Some 62 per cent of respondents said sovereign risk was the largest challenge to the UK financial system, followed by economic downturn (13 per cent). No respondents said that inflation, household credit, UK politics or operational risks were important threats to the UK financial system.