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The Friday Five: why banks are causing a panic
'It's an ugly picture,' says Mervyn King, governor of the Bank of England, speaking about the alarming state of the banking crisis.
1. Things are worse than we thought
To quote Meryvn King: ‘it’s an ugly picture’.
The UK is back in recession as we know, but in an exceptionally grim annual Mansion House speech last night the Bank of England governor warned that conditions have deteriorated even further since the inflation report only four weeks ago, with ‘weakening business surveys, a downward revision to measured output and further slowing in economies overseas’.
A slowdown in China, India and other ‘previously buoyant emerging economies’ such as Brazil, meanwhile, is adding to the gloomy outlook.
The problem is, explained Andrew Tyrie, chairman of the Treasury Select Committee, the British economy cannot fully recover until banks recover and begin lending more at reasonable rates.
2. The eurozone crisis is escalating
The impact of the escalating euro-area crisis on our banking system has our economy's leaders seriously concerned.
The rise in banking costs since the crisis intensified last year highlights the exposure of our major banks to periphery economies, King warned.
‘Any significant re-denomination of their currencies, or a default on domestic debts, would, both directly, and as a result for all our economies, put a dent in the capital position of our banks,’ he said. ‘As a result, investors demand a higher premium on loans to banks, pushing up the cost of borrowing for home-owners and businesses.’
The crisis has also created a ‘large black cloud of uncertainty’ – making it near impossible to quantify the risks of five or 10-year investments.
All eyes are now on the Greek elections this weekend, while Spain continues to battle to avoid a full-scale sovereign bailout.
3. Banks aren't lending
Before the financial crisis credit was too easily available, now the opposite is true, said King.
Data from the Bank of England shows that lending to small and medium-sized businesses – which he described as the ‘backbone of our economy’ – has fallen consistently since mid-2009.
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