-Updates Version Transmitted At 1130 GMT

LONDON (MNI) – Bank of England Governor Mervyn King has said
sentiment in financial markets has improved a little but warned that the
underlying picture for global growth remains weak and he highlighted the
concern that UK banks have overstated their capital strength.

Speaking at a press conference following the publication of the
Financial Stability Report, King also said that banks should be able to
raise additional capital without derailing the economic recovery by
reducing lending.

The BOE’s Financial Policy Committee said that banks’ capital
raising had slowed and they may well be overstating their capital
strength.

“This problem is manageable, perfectly manageable but it requires
some action now. Just deal with it now, we can do it. There’s no reason
why the actions that need to be taken can’t be done very quickly without
any damage or difficulty to the UK banking system,” King said.

King also said that the banks in which the UK government owns a
large stake will be able to raise their additional capital from the
private sector and won’t need new injections of cash from the taxpayer.

“It was made very clear that the Treasury do not want to put new
capital into the state owned banks… these recommendations do not imply
that the state will have to do that, capital can be raised from the
private sector, or other adjustments can be made,” King said.

Speaking alongside King, BOE Executive Director for Financial
Stability Andrew Haldane said that there was no hard or fast rule on
whether bank forbearance on loans is a good thing.

“There isn’t any hard or fast rule about when and whether
forbearance is a good or bad thing, we have evidence for both,” he
said.

When asked about the UK property market, Haldane said it is not for
the FPC to form judgements on whether any particular asset market is
over-inflated.

“What we have done is to work through the implications for UK banks
of existing stresses or potential future stresses that may indeed have
an impact on residential or commercial property prices,” he said.

Haldane highlighted, however, the FPC’s concerns over banks’
lending on commercial property.

He said there was evidence that banks had under-provisioned for
their extensive commercial property lending, and there was extensive
forbearance on the loans.

“We do have a significant overhang of legacy loans, commercial
property loans that account for fully half of all corporate lending by
UK banks,” Haldane said.

“A third, perhaps more, of those loans are subject to forbearance
(and) in some cases there is evidence of those loans being under-provided
for,” Haldane said.

“Six months ago we said it was already the case then that there was
some degree of under-providing for on commercial property loans… The
truth is that for a large part of the commercial property market right
now existing prices, existing valuations are not very firm because there
is effectively no liquidity, no transactions in the secondary market,
much less the tertiary market. It is an area we’re concerned about,” he
added.

-London newsroom: 4420 7862 7491 e-mail: wwilkes@marketnews.com
drobinson@marketnews.com

[TOPICS: M$B$$$,M$$BE$]