The extent of the losses banks expect to make from the current credit crunch may be exaggerated, the Bank of England has said.

But in its financial stability report, the Bank also warned that by refusing to lend money to even credit-worthy individuals or each other, financial institutions could turns fears of a financial crisis into reality.

"This could lead to a self-fulfilling adverse cycle in which persistent market illiquidity and falling asset prices further undermine confidence in banks and results in a sharper tightening of credit conditions," the report said.

The report estimates that the credit exposure not written down by UK banks could approach £100bn rather than the unprecedented levels many financial companies seem to be expecting.

Recently the Bank of England injected an extra £50bn into the financial system in a bid to encourage banks to start lending to each other again.