Raising the prospect of rights issues or even another taxpayer bail-out for the state-backed lenders Royal Bank of Scotland and Lloyds Banking Group, Sir Mervyn King said UK banks have “insufficient capital” to protect against undeclared losses on their books, reports The Telegraph.
He also ruled out suggestions that the Bank should try to boost growth by simply giving the public cash or cancelling the government debt it has bought through quantitative easing (QE).
Sir Mervyn admitted there were limits to QE, but did not rule out further money printing at the November Monetary Policy Committee meeting
Warning that the next generation may have to live with the consequences of past excesses “for a long time to come”, he said Britain’s banks needed to drop the “pretence” that their debts will be repaid.
“I am not sure advanced economies in general will find it easy to get out of their current predicament without creditors acknowledging further likely losses, a significant writing down of asset values, and recapitalisation of their financial systems,” he said.
“Only then will it be possible to return to a more normal provision of the vital banking services so crucial to an economic recovery… Just as in 2008, there is a deep reluctance to admit the extent of the undercapitalisation of the banking system in parts of the industrialised world.”
He compared the situation to the “pretence that debts could be repaid” in the 1930s and added: “We must not repeat that mistake.”
Four years since Lehman Brothers collapsed, UK banks still need taxpayer help as they “find it expensive to borrow” without central bank support, he claimed. To help, the Bank and the Treasury have set up funding for lending (FLS) to get cheaper credit through to households and businesses.
“The window of opportunity which it provides must be used to restore the capital position of the UK banking system,” Sir Mervyn said to the South Wales Chamber of Commerce.
A total of 20 banks accounting for 80pc of UK lending have signed up the scheme, which banks have until the end of January 2014 to access. The implication appears to be that they have 15 months to recapitalise and write off their bad debts. Although it is unclear how much capital he thinks they need, he is said to have wanted banks to raise billions of pounds more than the £100bn they did in 2008 – £67bn of which was from the state.
Bank analysis shows that UK lenders have eased lending terms for struggling businesses and households on £175bn of debt. Sir Mervyn hinted that it is a problem, saying: “Perhaps forbearance by banks has allowed inefficient firms that might otherwise have had to contract to continue.” Eurozone exposures also pose a risk.
Despite warning there was “no shortcut” to recovery, he said the economy was showing “encouraging signs” in comments that appeared to lower the chances of more QE in November. He said higher energy and food prices “are likely to leave [inflation] a little above target well into next year” and conceded that QE is not as effective in reducing gilt yields as originally.
He also accepted that monetary policy had “caused pain to those dependent on interest income”. But he said the Bank stands “ready to inject more money into the economy”. Turning to calls for inventive actions such as cash hand-outs or debt cancellation, he said the proposals were “dangerous” and “a road down which the Bank will not go”.