Bank governor warns of second credit crunch as UK remains vulnerable in eurozone crisis

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BANK of England governor Sir Mervyn King yesterday urged banks to brace themselves for a potential eurozone collapse amid fears that the UK is heading for a second credit crunch.

Sir Mervyn said financial systems around the world are vulnerable to the eurozone debt crisis and its underlying causes. However, he warned that a resolution was “beyond the control” of any UK authority.

Speaking in his role as chairman of the interim Financial Policy Committee, he said: “In the UK, we must try to bolster the resilience of our financial system to better withstand the storms that may come in our direction.”

The report comes after Downing Street warned that the UK was in the grip of a second credit crunch, and six central banks, including the Bank of England, acted to encourage lending between banks and stave off economic stagnation.

In its final meeting of the year, the interim Financial Policy Committee (FPC) labelled the euro area crisis as the “most significant and immediate threat to UK financial stability”.

The dilemma faced by the banks was underlined by the FPC’s recommendation to boost capital levels – to protect against future financial crises – while at the same time maintaining or boosting lending to households and businesses. In its financial stability report, the FPC said UK banks’ exposure to government debts of the so-called vulnerable five – Greece, Portugal, Italy, Spain and Ireland – totalled £14.8bn.

However, Sir Mervyn said UK banks were in a better position than their continental peers to withstand future financial shocks. It was also revealed yesterday that Yorkshire Bank and its sister Clydesdale have had their credit ratings cut for the third time in three months.

Ratings agency Standard & Poor’s downgraded the banks’ long term credit rating from A+ to BBB+, which could make it more expensive for the banks to raise funding.