Bank offering a shield from euro contagion

THE Bank of England is introducing loan “shock absorbers” for UK banks against possible contagion from any break‑up of the eurozone, the deputy governor revealed yesterday.

Charlie Bean described the present state of the single currency area as a “worrying situation”. He said that the BoE had recently introduced a temporary loan facility as a precaution, for use in the event that the eurozone crisis threatened UK financial institutions.

In a radio interview, he was asked if he feared a collapse in the single currency, with one or more of the 17 member states leaving the euro.

The deputy governor replied: “I don’t want to put probabilities on it breaking up, but it is clearly a worrying situation.

“Countries eventually may feel that they are better off outside the eurozone than in it. One thing that is important to stress is that it is not easy for a country to leave. It is quite a disruptive thing.

“If, say, Greece were to decide to leave and reintroduce the drachma, what you would probably find is that immediately people would take money out of Greek banks, the Greek bank system would be in great difficulties, businesses would find some of their assets and liabilities would be redenominated in drachmas while some would stay in euros, they could well find themselves going bankrupt. It’s a very, very costly direction to go.”

His comments came as the BoE issued a discussion paper setting out the powers it felt it needed to make its fledgeling new systemic regulator, the Financial Policy Committee, effective when it eventually takes over from the Financial Services Authority.

These included the ability to force UK banks to increase capital cushions over and above international standards.