–Adds Detail To Version Transmitted At 1118 GMT

LONDON (MNI) – UK banks are not in good shape, and small and medium
sized enterprises are facing financing problems, Bank of England
Governor Mervyn King said in a question and answer session at the Trades
Union Congress annual conference.

The BOE Governor said while larger companies are raising finance
without having to go through the banking sector, SMEs were struggling.

King said on “the role of banks in financing the recovery – they
are not in good shape.”

“That is not anyone’s fault but their own. The fact is that the
banking balance sheets are not in tremendously robust state,” he said.

“It is interesting that many bigger companies are going round the
banking system to finance directly and that is working well. The
problem, I think, is for many small- and medium-sized enterprises,” he
said.

“It is quite striking that over the past year the amount of money
which small and medium sized enterprises have been able to borrow from
the banks has actually been less than the amount they have repaid to the
banks. That isn’t going to encourage financial recovery,” King said.

King offered no immediate solution to the problem, saying “we have
to be sure we don’t allow the banks ever again to get into a state where
they can damange the prospects for recovery.”

The BOE governor was asked about high levels of bank bonuses. He
said that while it was hard to understand the justification for such
bonuses.

“I don’t think the answer is to rely on direct controls or even an
arbitrary ratio.”

He said he feared that if banks want to pay large amounts to
individuals “they will find a way to do it.”

King said banks were “using the implicit guarantee of the taxpayer
to take large risks and hence they feel that they can encourage, and
want to pay people, to take excessive risk.”

The BOE head said if people addressed the “fundamental question of
what banks are for, and why they at present have an excessive incentive
to take risks, then I would hope that the symptom of that, which is
these excessive bonuses, would disappear.”

–London newsroom 0044 20 7862 7491; email: drobinson@marketnews.com

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