–Adds Detail, Quotes To Earlier Versions
–Warns Greatest Risk Comes From Crisis Of Confidence
LONDON (MNI) – Bank of England Governor Mervyn King has warned
that although UK banks’ direct exposure to Greek debt is small,
uncertainty over which institutions in the global financial system
hold significant amounts of Greek debt could lead to market volatility
and a crisis of confidence.
King said the current eurozone problems were not a crisis of
liquidity, and the provision of liquidity could only buy time. The real
risk stems from a potential loss of confidence due to worries over
financial institutions’ exposures to the troubled eurozone periphery.
“The direct exposure to Greece of UK banks is really remarkably
small,” King said.
“At any given time there is always uncertainty about the scale of
exposures and which counterparty out there are heavily exposed,” he
added.
Speaking in a press conference following the publication of the
Financial Policy Committee’s Financial Stability Report, King also
warned that the ongoing euro-area sovereign debt crisis represents the
most immediate danger to the UK financial system.
“The most serious and immediate risk to the UK financial system
stems from the worsening sovereign debt crisis in several euro-area
countries. As the Report makes clear, direct UK bank exposures to those
economies are limited,” he said.
King also dismissed talk of a messy end to the euro-area sovereign
debt crisis becoming another “Lehman’s moment”. He said, however, that a
situation in which uncertainty over which institution holds what debt
could cause instability to materialise again.
“I’m not sure that the sovereign debt crisis and what happened to
Lehman Brothers have much in common,” he said.
“People may think that it’s just not worth rolling over funding to
institutions when there is that degree of uncertainty… it’s the sheer
uncertainty of knowing where things will go that creates the risk, no
more than that,” he added.
King also said that banks should use periods of rising profits to
build up capital buffers higher than the regulatory-required minimum,
but also said that the BOE does not think that UK banks should rush to
meet the new Basel III capital requirement targets.
“When times are good that is no time to be complacent about the
need to build greater resililience and buffers of capital above the
regulatory-required minimum… we are not suggesting in any way, shape
or form that banks get to the new Basel minimum faster than is the
transition put in that new framework,” King said.
The FPC also highlighted the risk that UK banks, in exercising
forbearance, particularly on commercial property loans were not taking
full account of the risk of these loans eventually going bad.
The BOE’s Andrew Haldane said that the improvement in banks’
profitability has been “driven by low impairments” and there was a fog
around the impairments question.
King also warned that the regulatory bodies “cannot hope to prevent
financial crises from happening.”
The report flagged the ongoing euro zone sovereign debt crisis as
the most immediate threat to the global financial system.
It also warned of the risks from a ‘snap back’ in bond yields from
their current low levels.
–London newsroom: 4420 7862 7491; email:
drobinson@marketnews.com/wwilkes@marketnews.com
[TOPICS: M$B$$$,M$$BE$,MT$$$$]
