The Bank of England has issued a dire warning about the threat the Euro crisis poses to British banks which have over £578bn of exposure to Eurozone debt. Mervyn King warns the situation is spiralling out of control.
He warned that UK domestic mortgage rates could increase sharply and suddenly if banks try to pass on losses or increased interbank borrowing costs to their customers. An increase of 1% in the mortgage rate would add almost £1,000 a year to the cost of an average £140,000 mortgage at a time when disposable household incomes are predicted to be over 7% less in 12 months time.
In the most serious public pronouncement on the crisis to date, Mervyn King warned that the situation was spiralling out of control and deteriorating conditions in the markets were 'characteristic of a systemic crisis'. Deputy Governor Paul Tucker described the situation as 'exceptionally perilous' and warned that 'anything could happen'.
The Governor asked UK banks to 'limit' the amount of money they hand out to staff and shareholders to 'improve the resilience of their balance sheets' to help prevent financial disaster in the increasingly likely event of a second credit crunch resulting from the imminent “extraordinarily serious and threatening” financial storms.
The Bank’s 2011 Financial Stability Report released yesterday raised the likelihood of a repeat of the last credit crunch that crippled the banking system and plunged many economies into recession.
Amid fears that at least one major European bank may be teetering on the brink of collapse central banks around the world, including the federal reserve and the Bank of England, joined forces a few days ago to pump 'unlimited' amounts of cheap money into the financial system in a desperate bid to prevent another crash.
Mervyn King admitted for the first time that the Bank of England, the Government and the Financial Services Authority are drawing up 'contingency plans' for the break-up of the Eurozone.
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