Sub-prime mortgages are estimated to amount to nearly $400bn and the International Monetary Fund has warned that the wider cost to the financial sector could be up to $1 trillion.
But in its twice-yearly Financial Stability Report, the Bank of England said "all of them are potentially significant overestimates of the losses within the wider economy associated with the financial market crisis".
It estimated actual losses to be closer to $170bn, saying that some calculation methods being employed could "significantly exaggerate the scale of losses that financial institutions might ultimately occur".
|"While there remain downside risks, the most likely path ahead is that confidence and risk appetite will return gradually in the coming months"|
Bank of England deputy governor
John Gieve, the bank's deputy governor, said in a statement released with the report that the "unavoidable correction after the credit boom is proving protracted and difficult".
"While there remain downside risks, the most likely path ahead is that confidence and risk appetite will return gradually in the coming months."
The bank has been criticised for its unsympathetic line on the lending squeeze at a time when central banks in the US and Europe are making money cheaper to borrow.
Some financial analysts have said that making credit more easily available led to the sub-prime crisis in the first place and while it may ease the credit crunch now, the approach by the US and European central banks will have detrimental effects in the long run.
The Bank of England's policymakers, wary of rescuing institutions from the consequences of their own risky behaviour, said they have to balance the very real threat of rising inflation against the harder-to-gauge prospect of a slowing economy.
"Losses recorded by financial institutions erode their capital, which may reduce their ability to offer finance to other households and corporations," the bank said.
"This may have a detrimental impact on economic performance.
"But it is at least partly offset by the household sector being in a less weak state than if its mortgage debts had to be repaid in full."
|There are fears the UK may follow|
the US into a recession [Reuters]
Nonetheless, there is strong evidence to suggest the British economy is already suffering at the hands of the credit crunch, with house prices falling, home loan approvals at record lows and consumer confidence at 15 year lows.
On Tuesday, David Blanchflower, a Bank of England policymaker, said aggressive action was necessary to thwart the risk of following the US into a recession and a 30 per cent slump in house prices.
But other members of the bank's Monetary Policy Committee have been more sanguine about the economy.
Mervyn King, the bank's governor, said a period of slower growth would not be a "disaster", saying it was not all doom and gloom just yet.
Last week the bank responded to increasing concerns about the consequences of the credit crunch by announcing an unprecedented £50bn ($10.3bn) swap scheme under which banks can trade in their hard-to-shift assets for risk-free government bonds.