Sir Mervyn has advised the banks to build up their financial buffers in an effort to withstand the threat from the eurozone crisis and said that the Bank itself was making “contingency plans” in case of a eurozone break-up. He has not revealed, however, what those contingency plans are.
Earlier this week, six central banks, including the Bank of England, took action to encourage lending between banks in order to keep the global economy moving and the President of the European Central Bank, Mario Draghi, told the European parliament that “downside risks” to the eurozone economic outlook had increased.
Sir Mervyn also said that the UK’s banks were amongst the strongest in the world, with tier 1 capital ratios, which are an internationally respected measure of a bank’s strength, at well above 12 per cent.
Speaking of the potential break-up of the eurozone, Sir Mervyn said: "There are many ways in which the future could play out. Maybe it (the eurozone) won't break up, maybe it will continue in various forms, but maybe there will still be questions of default."
The advice given by the Bank’s Financial Policy Advisory Committee (FPC), of which Sir Mervyn is chairman, is that the banks should keep lending but should build up their financial reserves by cutting internal dividends and bonuses
According to economists, it is remarkable for a central banker to deliver such a stark warning, showing the seriousness of the situation. However, Sir Mervyn is confident that the banks can withstand the threats if they set aside more capital.
IN his statement, however, he acknowledged that the financial problems re widespread and beyond the control of any UK authority alone.
For more information, please contact Glazers, Chartered Accountants London or visit www.glazers.co.uk
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