King warns banks to protect themselves from euro threat
Thursday, 01 December 2011 04:18
The Bank of England has recommended that banks build up their capital levels and construct a buffer zone as a result of the threat of the eurozone crisis.
The Governor of the Bank of England, Sir Mervyn King warned that banks should limit distributions if earnings are insufficient to provide the cover required and that they should issue new shares to raise funds if required.
Sir Mervyn said that “risks have intensified materially” since the last report was issued by the Financial Policy Committee (FPC). The committee reiterated its advice issued to the Financial Services Authority (FSA) to encourage banks to improve their balance sheets without reducing lending to the real economy.
The FPC said that the eurozone crisis remains the biggest threat to the UK economy and Sir Mervyn said that the Bank of England is making contingency plans in case of a break-up of the eurozone.
On Wednesday, six central banks, including the Bank of England outlined how they will work together to help keep liquidity in the global economy, headed by the Federal Reserve in the United States who will reduce the cost of purchasing dollars. China also contributed in a move that saw global stock markets rise by cutting the reserve requirement ratio for its commercial banks for the first time in nearly three years.
Sir Mervyn made no attempt to play down the possibility that the euro could collapse.
He said: "There are many ways in which the future could play out. Maybe it won't break up, maybe it will continue in various forms, but maybe there will still be questions of default.
"Ultimately, governments will have to confront the underlying causes".
The FPC currently only operates in an advisory capacity but from the start of 2013 it will become the UK’s main financial regulator.
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