Financial system in ‘crisis’ warns Mervyn King as he plans for break-up of eurozone and tells banks to slash staff bonuses

Thursday, December 1, 2011
By Paul Martin

Sir Mervyn King warns eurozone crisis ‘beyond the control’ of any UK authority
Bank of England preparing for the worst case scenario
Downing Street says Britain is in the grip of a second credit crunch
But Governor says Britain’s banks are among the strongest in the world

By Hugo Duncan and Rob Cooper
1st December 2011

The financial system is in ‘crisis’ and banks should get their houses in order to protect from a second credit crunch, the Bank of England said today.

Governor Sir Mervyn King said meltdown in the eurozone was ‘the most significant and immediate threat to UK financial stability’.

He warned that banks need to raise more funds to shield themselves from ‘the current exceptionally threatening environment’.

Banks should keep lending to households and businesses but cut bonuses for staff and dividend payments to shareholders, he said.

Deputy governor Paul Tucker described the situation as ‘exceptionally perilous’ and warned that ‘anything could happen’.

The language – rare for usually reserved central bankers and the strongest since the crisis erupted four years ago – underlined the severity of the situation.

Appearing in his role as chair of the interim Financial Policy Committee (FPC), the Governor said: ‘In the UK, we most try to bolster the resilience of our financial system to better withstand the storms that may come in our direction.’

His warning comes after Downing Street said that Britain was in the grip of a second credit crunch, and six central banks, including the Bank of England, acted to encourage lending between banks and stave off economic stagnation.

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