Bloomberg News

King Urges Banks to Bolster Defenses as ‘Systemic Crisis’ Looms

December 01, 2011

(For more on the region’s debt crisis EXT4.)

Dec. 1 (Bloomberg) -- Bank of England Governor Mervyn King urged banks to enhance efforts to bolster their defenses against the euro region’s debt turmoil, which now looks like a “systemic crisis.”

“An erosion of confidence, lower asset prices and tighter credit conditions are further damaging the prospects for economic activity and will affect the ability of companies, households and governments to repay their debts,” threatening banks’ balance sheets, King told reporters in London today. “This spiral is characteristic of a systemic crisis.”

The U.S. Federal Reserve cut the cost of dollar funding for European financial institutions yesterday in a coordinated move with other central banks. That measure came two days after King said there are “early signs” of a credit crunch in the euro region, where leaders face increasing pressure to resolve intensifying turmoil.

“Sovereign and banking risks emanating from the euro area have intensified and remain the most significant and immediate threat to U.K. financial stability,” the central bank said in its Financial Stability Report published today. It said that if banks’ earnings aren’t enough to build capital, they should limit payments of bonuses and dividends and “give serious consideration” to raising external capital.

The central bank’s Monetary Policy Committee restarted bond purchases in October to aid the recovery and cut its economic growth forecasts this month. Officials warned today that the strains in interbank markets could threaten economic growth.

Credit Squeeze

“The current funding pressures facing banks could lead to a renewed tightening in credit conditions for real economy borrowers,” the central bank said.

The central bank also published the recommendations of its Financial Policy Committee, which met on Nov. 23. The panel said the Financial Services Authority should encourage banks to disclose leverage ratios to investors by the start of 2013.

The Bank of England said in the FSR that U.K. banks have 140 billion pounds ($220 billion) of term funding due to mature in 2012, concentrated in the first half of the year. It said short-term money market funding conditions have “been fragile over the past few months, with banks finding it harder to roll over all of their maturing funding and tenors shortening.”

“We are certainly making a contingency plan” for further intensification of the crisis, King said. The government, along with Financial Services Authority and the Bank of England are working on those plans, he said.

Sovereign Debt

While Britain’s banks have 15 billion pounds of exposure to sovereign debt in the most-vulnerable euro-area economies, they have “significant” exposures to the private sectors of Ireland, Spain and Italy. This exposure amounts to about 160 billion pounds, or 80 percent of their core Tier 1 capital.

“U.K. banks have made significant progress in improving their capital and funding resilience,” the Bank of England said. “But progress has been set back recently and they have been affected by strains in bank funding markets.”

King today reiterated that a solution to the turmoil rests with euro region governments.

“The crisis in the euro area is one of solvency and not liquidity,” he said. “Only the governments directly involved can find a way out of this crisis,” he added that “here in the U.K. we must try and find a way to bolster the resilience” of the financial system.

--Editor: Fergal O’Brien, Andrew Atkinson

To contact the reporter on this story: Ben Moshinsky in London at

To contact the editor responsible for this story: Craig Stirling at

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