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Bank says economic climate 'extraordinarily serious' | Bank says economic climate 'extraordinarily serious' |
(about 6 hours later) | |
Banks should brace themselves to withstand the "extraordinarily serious and threatening" economic situation, the Bank of England governor has said. | Banks should brace themselves to withstand the "extraordinarily serious and threatening" economic situation, the Bank of England governor has said. |
The Bank's Financial Policy Committee (FPC) said the eurozone crisis was the biggest threat to the UK's banking system. | The Bank's Financial Policy Committee (FPC) said the eurozone crisis was the biggest threat to the UK's banking system. |
It said banks should build up their financial buffers to withstand that. | It said banks should build up their financial buffers to withstand that. |
Bank governor Sir Mervyn King said the Bank itself was making "contingency plans" in case of a eurozone break-up. | Bank governor Sir Mervyn King said the Bank itself was making "contingency plans" in case of a eurozone break-up. |
However, he would not go into any details as to what these were. | However, he would not go into any details as to what these were. |
Sir Mervyn said it did not make sense to say that there was "a single well-defined event against which we have to make contingencies". | Sir Mervyn said it did not make sense to say that there was "a single well-defined event against which we have to make contingencies". |
He said: "There are many ways in which the future could play out. Maybe it [the eurozone] won't break up, maybe it will continue in various forms, but maybe there will still be questions of default." | He said: "There are many ways in which the future could play out. Maybe it [the eurozone] won't break up, maybe it will continue in various forms, but maybe there will still be questions of default." |
On Wednesday, six central banks, including the Bank of England, took action to encourage lending between banks in order to keep the global economy moving. | On Wednesday, six central banks, including the Bank of England, took action to encourage lending between banks in order to keep the global economy moving. |
But Sir Mervyn said that, "ultimately, governments will have to confront the underlying causes". | But Sir Mervyn said that, "ultimately, governments will have to confront the underlying causes". |
If anyone was in any doubt about the severity of the eurozone crisis and what it might mean for the UK, they shouldn't be any more. | If anyone was in any doubt about the severity of the eurozone crisis and what it might mean for the UK, they shouldn't be any more. |
The governor of the Bank of England delivered his starkest warning yet. It's quite something for a central banker to describe the financial climate as "extraordinarily serious and threatening". | The governor of the Bank of England delivered his starkest warning yet. It's quite something for a central banker to describe the financial climate as "extraordinarily serious and threatening". |
Sir Mervyn King made no attempt to play down speculation about the possible break-up of the eurozone. He thinks banks can weather storms ahead if they set aside more capital. | |
But he acknowledged that the problems were widespread and beyond the control of any UK authority. | |
To sum up the financial regulators' message - fasten your seatbelts for what could be a very bumpy ride. | To sum up the financial regulators' message - fasten your seatbelts for what could be a very bumpy ride. |
"Resolving these wider problems is beyond the control of any UK authority," he added. | "Resolving these wider problems is beyond the control of any UK authority," he added. |
Earlier, president of the European Central Bank (ECB), Mario Draghi, told the European Parliament that "downside risks" to the eurozone economic outlook had increased. | Earlier, president of the European Central Bank (ECB), Mario Draghi, told the European Parliament that "downside risks" to the eurozone economic outlook had increased. |
Dividends and bonuses | Dividends and bonuses |
Sir Mervyn said that the UK's banks were among the strongest in the world, with tier 1 capital ratios - an internationally respected measure of a bank's strength - at well above 12%. | Sir Mervyn said that the UK's banks were among the strongest in the world, with tier 1 capital ratios - an internationally respected measure of a bank's strength - at well above 12%. |
That is higher than they were before the credit crisis began in 2008. | That is higher than they were before the credit crisis began in 2008. |
Sir Mervyn said one way for UK banks to gain further strength would be to raise money by issuing new shares. | Sir Mervyn said one way for UK banks to gain further strength would be to raise money by issuing new shares. |
The FPC also said that banks should keep lending, but should cut dividends and bonuses in order to help build up their financial reserves. | The FPC also said that banks should keep lending, but should cut dividends and bonuses in order to help build up their financial reserves. |
Some bankers argue that tighter capital requirement rules mean lower lending, as banks are forced to hang on to assets as a contingency, rather than pass it on to borrowers. | Some bankers argue that tighter capital requirement rules mean lower lending, as banks are forced to hang on to assets as a contingency, rather than pass it on to borrowers. |
The chief executive of Royal Bank of Scotland, the bank now majority-owned by the UK government, said recently that strict regulation meant investors saw UK banks as a "dumb" place to invest, and that it limited banks' ability to lend. | The chief executive of Royal Bank of Scotland, the bank now majority-owned by the UK government, said recently that strict regulation meant investors saw UK banks as a "dumb" place to invest, and that it limited banks' ability to lend. |
The FPC is chaired by Sir Mervyn, and at present only has an advisory role. | The FPC is chaired by Sir Mervyn, and at present only has an advisory role. |
Once the legal framework is in place, it is expected to become the country's top financial regulator from the start of 2013. | Once the legal framework is in place, it is expected to become the country's top financial regulator from the start of 2013. |