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King: Banks need to admit extent of bad debts before recovery

Mervyn King 480

Bank of England governor Sir Mervyn King has warned banks to accept that loans will continue to go bad and to concentrate on boosting capital so that the economy can recover.

Speaking to the South Wales Chamber of Commerce in Cardiff yesterday, King said insufficient capital remained a problem.

He said more than 20 banking groups covering 80 per cent of lending to households and businesses have now signed up to the Bank’s Funding for Lending Scheme, which aims to encourage lending through access to finance at cheaper rates.

King said: “The Funding for Lending Scheme can only be a temporary scheme. The window of opportunity which it provides must be used to restore the capital position of the UK banking system.”

But he warned lenders need to admit the extent of losses held on their books before the recovery can begin.

He said: “I am not sure that advanced economies in general will find it easy to get out of their current predicament without creditors acknowledging further likely losses, a significant writing down of asset values and recapitalisation of their financial systems.

“Only then will it be possible to return to a more normal provision of vital banking services so crucial to an economic recovery. In the 1930s, faced with problems of sovereign and other debt similar to those of today, the pretence that debts could be repaid was maintained for far too long. We must not repeat that mistake.”

King said it was clear the rebalancing of the UK economy is proceeding at a “slow and uncertain pace”. He said the Bank’s Monetary Policy Committee will think carefully before extending its £375bn quantitative easing programme, but that it does stand ready to do so.

He added: “Printing money is not, however, simply manna from heaven. There are no shortcuts to the necessary adjustment in our economy. The problems in the world economy mean we shall have to be patient.”

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Comments

There are 8 comments at the moment, we would love to hear your opinion too.

  1. ken170647 youtube 24th October 2012 at 10:48 am

    The housing market needs to recover. In order to recover, people need to borrow money. The outlawing of interest only mortgages will be catastrophic for the housing market, cause further reductions in property values which in turn will cause more bad loans. Interest only loans to a low risk LTV are essential for people who are property asset rich and who require loans over a relatively short period. I’m thinking of people 55+. Mortgage upper age limits should be abolished. If the mortgage is affordable age should not come into it!

  2. The government has learnt nothing from previous scandals in relationship to guaranteed products. I would ask this minister to go back and review the Equitable Life, Lehman Bros and Key Data miss-selling scandals before it forces guaranteed products onto the industry.

    Maybe the government would like to stand as guarantors the future collapses if they are hell bent on forcing guaranteed products on the industry. I suspect that if this was the case the Treasury would soon put an end to that idea.

    Although this may sound like a good idea in reality the losers would be the consumer having to pay higher premiums for a levy that would only add costs and in reality what is needed is greater education of financial products and greater access to advice.

  3. to Kent170647

    I totally disagree with your comments in respects to interest only mortgages, this is part of the reasons why we got into this madness in the first place. The fact is if you purchase a house you need to be able to repay the debt at the end of the specific mortgage term.

    The fact is interest only mortgages also help to inflate house prices as lenders lent ever-increasing amounts of money based on interest only repayments.

    The other factor is that banks need to have money we paid so it can be recirculated within the economy otherwise that always going to be reliant on quantitative easing programme as they are never going to have enough money on their balance sheet to lend to new borrowers. Lenders are not charities and they certainly aren’t responsible for social housing. If people don’t want to purchase a house maybe they should rent as effectively that is what an interest only mortgage is an banks should not be involved in this activity.

    I know many people will disagree with this point of view but I feel sorry for the first time buyers who will never be able to buy house because house prices have been pushed up to ridiculous levels partly because of interest only mortgages. I’ve seen an awful lot clients over the last five years with interest only mortgages and no repayment vehicle in place looking to potentially sell because they have no chance of repaying the capital and the banks won’t extend their mortgage because there are approaching retirement.

  4. ken170647 youtube 24th October 2012 at 11:31 am

    People who are against interest only mortgages seem to have a very limited understanding of how the housing market works. Believe me, once interest only mortgages (leaving the borrower freedom to decide how the repay at the end of the mortgage term – with age no restriction) are banned, there will be catastrophic declines in property values and further economic misery for years to come.

  5. Ken

    You are dead right – there’re are a few on here who have limited understanding of how banks work too.

    Even with the changes in capital requirement, If banks lent solely off balance sheet all capitalist economies would collapse !

  6. Pierre Bertrand Boulle 24th October 2012 at 12:20 pm

    Within the context of what is going on, the question is : what does Bank of England governor Sir Mervyn King know that we don’t?

    Reading between the lines, it is rationally obvious to me that the banks will be forced to reveal further write downs when they are finally forced to very reluctantly wrench off casino ‘assets’ from genuine client assets.

    I would surmise that these losses do exist and are still on Bank balance sheets but currently in a grey area, probably ‘obscured’ by client assets. (Ring a bell?)

    Banks must know this and the Bank of England presumably knows it too, hence the comments from King within the context and timing of the forthcoming segregation and ring fencing of client assets from banks’ proprietary positions.

    Does anyone agree with me?

  7. the above arguement is already redundant Interest only mortgages have already been abolished for those without an existing repayment strategy, therefore the ‘choice of how to repay’ must already be in place. For thise with existing Interest Only mortgages already the lenders are using underhand techniques to get client to switch onto repayment, such as refusing to over another choices of products at the end of the initial product term and increasing their SVR’s.

  8. Halifax stated back in 2007 that 60% of all its London mortgages were interest only maybe thats the right down that King is on about. Loans have to be repaid at some point it is a simple fact of recirculation of capital.

    After all, if you are running a bank yourself and you have 1 billion pounds to lend out some point you would run out, of additional lending funds. If you had none of that money repaid. For those that are a supporter of interest only mortgages which is based on the concept of asset increase just remember that those assets can also go down as well as up. Look at Greece, Spain and Ireland as examples.

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