King: Banks need to admit extent of bad debts before recovery

Mervyn King 480

Bank of England governor Sir Mervyn King has warned banks to accept that loans will continue to go bad and to concentrate on boosting capital so that the economy can recover.

Speaking to the South Wales Chamber of Commerce in Cardiff yesterday, King said banks’ problem remains insufficient capital.

He said more than 20 banking groups covering 80 per cent of lending to households and businesses have now signed up to the Bank’s Funding for Lending Scheme, which aims to encourage lending through access to finance at cheaper rates.

King said: “The Funding for Lending Scheme can only be a temporary scheme. The window of opportunity which it provides must be used to restore the capital position of the UK banking system.”

But he warned lenders need to admit the extent of losses held on their books before the recovery can begin.

He said: “I am not sure that 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.

“Only then will it be possible to return to a more normal provision of vital banking services so crucial to an economic recovery. In the 1930s, faced with problems of sovereign and other debt similar to those of today, the pretence that debts could be repaid was maintained for far too long. We must not repeat that mistake.”

King said it was clear the rebalancing of the UK economy is proceeding at a “slow and uncertain pace”. He said the Bank’s Monetary Policy Committee will think carefully before extending its £375bn quantitative easing programme, but that it does stand ready to do so.

He added: “Printing money is not, however, simply manna from heaven. There are no shortcuts to the necessary adjustment in our economy. The problems in the world economy mean we shall have to be patient.”