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King calls for new UK banks

Bank of England governor Mervyn King has called for the creation of new, small banks to aid the funding of small businesses and individual borrowers.

Speaking in front of the Treasury Select Committee this afternoon, King revealed his surprise that there were no new lenders entering into the market.

He said: “This is certainly time when one would expect to see, and indeed hope to see, new banks emerge. A new bank does not have the legacy problems of high leverage and loans that have gone bad, in the US we are seeing a lot of new banks being set up but we are not seeing that.

“It is important that we try and ease the way, as far as we can, to help new banks enter the market. Plus other vehicles to allow the transfer of savings to the borrowers who would normally use traditional banking.”

This was in opposition to remarks made by FSA chairman Lord Turner at yesterday’s Treasury Select Committee, who argued that problems associated with small banks could lead to another financial crash.

The governor also warned the Government to reassess the speed at which it is planning to reduce the UK’s fiscal deficit – King says the 5 per cent GDP deficit must be reduced before the planned 2014 deadline.

He said: “The time at which deficits have to be reduced has to be faster than the projections if the economy were to recover along the path assumed by the Budget. We can’t afford to wait until the Parliament after next before taking action to credibly prove the UK is going to reduce the fiscal deficit.”

But he said that no one yet has a plan to reduce the deficit as there is no past data to compare the economy’s current situation: “These are enormous deficits that we have not seen for an awfully long time.”

King also reiterated the Monetary Policy Committee’s stance on the planned cessation of Bank support to the financial sector. He said that the economy alone will be the measure by which the MPC will be able to decide whether to unwind the asset purchase schemes and the quantitative easing strategy.

He said: “These are difficult, tricky judgements – if you get it wrong in one direction you see a reoccurrence of a downturn, if you get it wrong in the other inflation picks up too quickly and it is costly to get rid of. But these are economic judgments we are paid to make, and they are not ones we take in a week, it will be a difficult path.”

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