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BoE’s King calls for exit strategy for bank aid

Bank of England governor Mervyn King has called for the banks and the authorities to work together to plan an exit strategy for state support of the banking system.

At his Mansion House speech in the City of London last night, King warned that the state’s lifeline to the banks would not be indefinite and reiterated his call for the Bank of England to be given greater powers to help it maintain financial stability.

He said: “No bank should expect that the current extraordinary liquidity support will continue forever. In due course, a strategy will be needed to exit from that temporary support. The Bank of England will talk with the banks about how to manage the transition.”

King called for the Bank to be given more power within its “macro-economic toolkit” to manage the UK financial system.

He said: “The overarching lesson from this crisis is that the authorities lacked sufficient policy instruments to take effective actions.”

The governor also called for the banks to be able to show how they would wind down business in the event of a collapse.

He said: “Making a will should be as much a part of good housekeeping for banks as it is for the rest of us. A plan for an orderly wind down of activities would provide the information to the authorities the absence of which made past decisions about the future of institutions difficult.”

King also commented on the Bank’s current quantitative easing strategy – noting “tentative signs” of success but said more time was needed to assess the £125bn injection.

King said: “The success of the policy is not to be judged by the increase in bank lending. The outlook for inflation will guide decisions on the pace and timing of a withdrawal of monetary stimulus.”

But he did warn that the system was not fixed yet, regardless of positive economic signs.

He said: “Market data on credit spreads imply that some banks are viewed as a worse credit risk than some of their customers. As a result, companies that can bypass the banks to access capital markets directly are doing so. With current market sentiment it may take further additions to equity capital before the banking system will be able to supply credit at a price and on a scale to finance a sustained recovery.”

CMS Cameron McKenna partner Paul Edmondson says: “Mervyn King is right to challenge the current position and demand effective powers to meet the Bank’s responsibilities for financial stability.

“FSA’s tool-kit for firm regulation is reasonably comprehensive, but in contrast the Bank of England is hamstrung. The new provisions for the Financial Stability Committee are wholly inadequate and there is still a huge unanswered question as to how macro-prudential policy will actually be deployed.”

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