In his Mansion House speech in the City of London last week, King said regardless of the BoE’s numerous strategies, the system was not fixed and warned that “the path to full recovery could be protracted”.
He said: “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. It may take further additions to equity capital before the system will be able to supply credit at a price and on a scale to finance a sustained recovery.”
Ignis economist Stuart Thomson says the healing process has yet to even begin in the UK. “The process of reducing very high leverage is in its infancy – few of the biggest banks failed to reduce leverage ratios for 2008. It just shows you how fragile and damaged the UK banking sector is,” he says.
King also commented on the bank’s quantitative easing strategy and noted “tentative signs” of success but said more time was needed to assess the £125bn injection.
He 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.”
Thomson says the strategy has worked in some ways: “Quantitative easing may not have provided the increase the full healing process but what it has done is provide liquidity and confidence in the system and that was the catalyst for the risk rally from March.”