The King reaper

Tim Wallace
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A NEW credit crunch could hit the UK if the crisis ravaging the Eurozone spreads to Britain’s banking system, Bank of England Governor Sir Mervyn King warned yesterday in one of his grimmest interventions to date.

Deputy governor Paul Tucker added to the sense of gloom, warning “almost anything could happen in the Eurozone in the next few months”.

He added: “It is in the interests of banks’ shareholders and the economy as a whole to put themselves in a position to withstand this.”

Banks should build up capital to prepare for the oncoming storm, the Bank’s Financial Policy Committee said, although it urged them to keep lending to individuals and businesses at the same time.

The financial stability report, published yesterday, stressed how greatly the situation in Europe has changed in the last six months.

“Extraordinarily serious and threatening” conditions mean some European banks are having trouble borrowing, particularly in dollars, it said.

If worries over inter-bank lending spread to the UK, or if UK banks suffer losses in the Eurozone, households and businesses may be hit by a second credit crunch similar to the one that presaged the 2008 financial crisis.

A “systemic crisis” could already be upon us, Sir Mervyn said, adding that while British banks were better prepared than in 2008 they would still need to take more action.

“UK banks are better capitalised than many of their continental peers,” said Sir Mervyn yesterday, although he added that it would be “sensible and desirable to raise capital buffers further in order to improve resilience in light of the continuing threats to UK financial stability.”

Banks should also be urged to disclose leverage ratios as part of their usual reporting from 2013, two years earlier than the 2015 deadline imposed by the Basel III rules.

However, the crisis means they are struggling to raise capital at just the time they might need it most.

Retaining profits and slashing bonuses could also help raise capital, Sir Mervyn said, although he acknowledged the risk that shoring up balance sheets could mean less money to lend out to businesses and individuals.

Banks should “not reinforce the strains in financial markets or threaten the supply of credit”, he said.

The Financial Services Authority should “encourage banks to improve the resilience of their balance sheets without exacerbating market fragility or reducing lending”, he added.

European Central Bank stats yesterday revealed demand from small- and medium-sized enterprises rose from April to September, but that banks were increasingly reluctant to lend.