Warning to UK banks over possible eurozone collapse
Bank of England Governor Sir Mervyn King. Picture: PA
Bank of England Governor Sir Mervyn King today urged banks to brace themselves for a potential eurozone collapse amid fears that Britain is caught in a second credit crunch.
Sir Mervyn said financial systems around the world are vulnerable to the eurozone debt crisis and its underlying causes - but warned a resolution was “beyond the control” of any UK authority.
Appearing in his role as chair of the interim Financial Policy Committee, the Governor said: “In the UK, we most try to bolster the resilience of our financial system to better withstand the storms that may come in our direction.”
The report comes after Downing Street warned last night that Britain was in the grip of a second credit crunch, and six central banks, including the Bank of England, acted to encourage lending between banks and stave off economic stagnation.
In its final meeting of the year, the interim Financial Policy Committee (FPC) labelled the euro area crisis as the “most significant and immediate threat to UK financial stability”.
The dilemma faced by the banks was underlined by the FPC’s recommendation to boost capital levels - to protect against future financial crises - while at the same time maintaining or boosting lending to households and businesses.
In its financial stability report, the FPC said UK banks’ exposure to government debts of the so-called vulnerable five - Greece, Portugal, Italy, Spain and Ireland - totalled £14.8 billion.
Total exposure to the vulnerable five, including private sector debt, is £191.8 billion.
However, Sir Mervyn said UK banks were in a better position than their continental peers to withstand future financial shocks.
But credit conditions in the UK could tighten if banks are forced to take higher credit losses on exposures to the euro area - where the FPC warned there are already signs of a credit contraction.
Sending a stark message to political leaders, the governor said: “Ultimately, governments will have to confront the underlying causes. Resolving these wider problems is beyond the control of any UK authority.”
The FPC reiterated its recommendation that UK banks cap bonuses or dividends if their balance sheets do not appear to be robust enough to withstand major financial shocks, such as a collapse of the euro or a UK credit downgrade.
Sir Mervyn added: “The crisis in the euro area is one of solvency and not liquidity. And the interconnectedness of major banks means that banking systems, and hence economies, around the world are all affected.”
Sir Mervyn refused to be drawn on details of any contingency plans the Bank or the Government may be drawing up in the event of a collapse in the euro.
The governor was the driving force behind yesterday’s emergency action taken by the Bank and five of its international counterparts, including the European Central Bank and US Federal Reserve, which triggered a rally on global markets.
Investors are increasingly worried that European banks are exposed to huge losses on loans they have made in Greece, Italy and other indebted countries.
Europe’s leaders will hold yet another summit on December 9, where it is hoped they will deliver the final word on a response to the eurozone crisis.
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Comments
There are 15 comments to this article
Page 1 of 1
trenchchat
Friday, December 2, 2011 at 11:04 AMThe scary thing is that no political party of the right, left or centre, including the NATS with their superficial Plan McB has any answers to the economic problems which day by day are geting deeper. Labour's dented shield policy is deeply flawed which is why the coalition are running rings around them, The coalition have only one card to play for now which is printing more money, and of course, if Scotland were to become independent the SNP would either have to carry out even more cuts or raise taxes because they have no radical plans to take over the commanding heights of the economy including oil. Scotland is owned by outside corporate companies and interestsso taxing them even more would lead to a strike of capital and a shift abroad. Keynianism is a dead duck - so whats left? ~Answers to the IMF ASAP.
Scotindy
Friday, December 2, 2011 at 04:42 AMScotland just requires to have it's own banking system. Finished totally independent and willing to give the english a couple of loans at reasonable interest rates..........Simple really
Castaway
Friday, December 2, 2011 at 01:25 AMWhat will happen to the UK when there is a two-speed Europe ? the UK can either join the euro or remain in the second tier...... The French President, Nicolas Sarkozy. In a speech in November 2011 he said "there will be a two-speed Europe: one speed that moves toward more integration in the eurozone and one speed for a confederation in the EU."......Britain is concerned about the possible impact of a two-speed Europe in which it could be left on the margins along with other countries outside the euro. 1 Dec 2011
BillDunblane
Friday, December 2, 2011 at 12:50 AM"I'm sorry sir, can't help you with a business loan, even at 10% over base - hadn't you heard what Mervyn King said? Oh, and while you're here, can I interest you in our new account, does what your last account did, but we charge an extra £12 a month - you DO get free keyring however."
antiparasite
Friday, December 2, 2011 at 12:39 AMWe need shot of this lot... Start our own bank, take payment for oil in gold and some cash for quick investment, I could go on, but in short we could stick the finger right up tae them!
British
Thursday, December 1, 2011 at 09:47 PMWhy not bail out the trams too! That's getting towards debts of small sovereign states now! Hospitals, schools, road repair?? No edinburgh needs a tram for what will be 1 billion pounds by the time its finished( if ever.)
Maurice the Dolphin
Thursday, December 1, 2011 at 09:28 PM#6 Jimmy, you see how alex Salmond can rhyme off all the banks that are bailed out with our money since the banking crisis began but has amnesia when it comes to mentioning the Royal Bank of Scotland. I remember another SNP even having the audacity to say the Royal Bank of Scotland collapse wasn't to do with the bankers as the banking collapse in England was, but the RBS collapsed because.....wait for it! - 90% of its operations are in England and 10% are in Scotland! lol
Maurice the Dolphin
Thursday, December 1, 2011 at 09:22 PM#5 Jings Jimmy! there's no mention of the Iraq War in that post either!
Willie Boy
Thursday, December 1, 2011 at 08:33 PMSomething doesn't gel. This is supposed to be Britain's Decade of Prosperity. Gordon Brown told us so when he rescued the banks which had gotten themselves into a little difficulty not of their making. With the bankers back on bonuses running into billions, why are we not all, like Lord Mandelson, quaffing champagne on the yacht. Or is it just God Bless the little folks for taking the cuts.
Jimmy Fae the West
Thursday, December 1, 2011 at 07:46 PMNorthern Rock was taken into state ownership (Bailed out by the tax payer in February 2008!!! Was that the EURO's fault too? Probably the fault of the SNP instead!
Jimmy Fae the West
Thursday, December 1, 2011 at 07:43 PMHootrag headline for britisher Nutt-cases; Euro-crisis-poses-a-clear-and-present-danger-to-UK-banks????
Jimmy Fae the West
Thursday, December 1, 2011 at 07:40 PMPending Moderation
Tartancult
Thursday, December 1, 2011 at 07:11 PMNot exactly news to those of us who actually look beyond the narrow borders of Britain.
British
Thursday, December 1, 2011 at 05:26 PMIf only the Bank of England hadn't bailed out the Royal Bank of Scotland and Halifax Bank of Scotland. We would be so much richer.
ronburgendy
Thursday, December 1, 2011 at 04:59 PMI am stunned by these comments. We all know that the eurozone is a complete crisis but by telling the banks to build up their capital reserves it will only lead to one thing...less lending. You can tell them over and over again to take it from bonuses and dividends but this is simply another excuse the banks have to stop continue their disgraceful lack of lending. How has Mervyn King kept his job through all of the problems we have faced since prior to the recession? Disgraceful!
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