King Warns UK Banks To Build Warchests To Face 'Exceptional Threat' Of Eurozone Meltdown - But To Keep Lending Too!

By Adrian Lowery

Last updated at 1:05 PM on 1st December 2011

Dailymail

British banks needs to build up their capital reserves to withstand the ‘exceptional threat’ of a eurozone meltdown, the Bank of England warned today.

But Governor Sir Mervyn King at the same time exhorted them to keep lending in order to prevent the UK being drawn into a latter-day credit crunch.

Delivering the Bank’s financial planning committee report on stability, Sir Mervyn said the eurozone crisis was ‘the most significant and immediate threat to UK financial stability’, and that a resolution was ‘beyond the control’ of any UK authority.

He warned that banks might have to cut dividends and bonuses, or issue new shares, to build warchests that could definitely withstand a collapse of the euro.

But he sweetened the pill by noting that UK banks were among the strongest in the world, with tier 1 capital ratios – a widely accepted benchmark of bank strength – stronger than they had been before the Lehman crisis, at well over 12%.

UK banks’ exposure to government debts of the so-called vulnerable five – Greece, Portugal, Italy, Spain and Ireland – totals £14.8billion. Total exposure to the vulnerable five, including private sector debt, is £191.8 billion.

Sir Mervyn added that the Bank of England was making ‘contingency plans’ for a eurozone break-up but would not make public any details.

He also said he had initiated talks that led yesterday to dramatic and concerted action from world central banks to avert a second credit crunch.

‘As far as the swap agreements that were published yesterday by the group of central banks,’ he said. ‘It was the result of conversations which I initiated as chairman of what used to be known as the G10 governors, now the economic consultative committee among a limited number of central banks.’

World stock markets shot up yesterday after the multinational agreement ws revealed, in the hop it would head off a repeat of the 2008 crash, when banks simply stopped lending to each other, bringing the world economy to a halt.

The dramatic rescue bid, aimed at giving banks better access to hundreds of billions of dollars, saw the FTSE 100 index close 3 per cent higher yesterday, with even bigger gains on the Continent.

The operation – strikingly similar to action taken in the wake of the collapse of the U.S. investment bank Lehman Brothers in 2008 – came amid fears that at least one major European bank may be teetering on the brink of collapse and that the eurozone countries could not be trusted to act swiftly enough to solve their problems.

The credit ratings agency Standard & Poor’s downgraded its ratings on 15 global banks – including Barclays and HSBC – by one notch yesterday.

Bank of England sources said last night the money being made available to struggling banks under the new facility was ‘unlimited’. But a similar scheme during the last credit crunch peaked at $583billion (£365billion) in late 2008.

John Higgins, of the Capital Economics research consultancy, said the central banks’ intervention would provide temporary relief for Europe, but warned that it was ‘not a game changer’. He added: ‘Welcome as the news was, we do not think it signals a turning point in the crisis.’

Investors will watch French and Spanish bond auctions today to see if the liquidity moves bring down the price of borrowing for those countries.