THE UK's banks face a "painful adjustment" in the coming months as losses from the summer credit crunch mount, Bank of England Governor Mervyn King warned yesterday.
The gloomy forecast came as the Treasury increased its funding guarantees to stricken mortgage lender Northern Rock, the biggest victim of the financial turmoil so far.
Mr King told MPs on the Treasury select committee: "A painful adjustment faces
the global banking sector over the next few months as losses are revealed and new capital is raised to repair bank balance sheets."
But in a piece of better news, official figures showed inflation remained steady with the benchmark consumer prices index unchanged at 2.1 per cent last month. When quizzed over the possible nationalisation of the Newcastle-based lender – which has borrowed an estimated £25 billion so far – Mr King refused to rule out the option.
The Treasury's latest bail-out is seen as key to protecting Northern Rock's credit ratings over its corporate borrowings.
The bank will pay an "appropriate fee" for the extension of the guarantee arrangements, which have already been extended to all savers.
A Virgin-led consortium and the Olivant investment group are vying to take over the lender, but nationalisation or administration could loom if the bids fail.
Central banks across the world have moved to pump billions of dollars into world markets in the past week, in an effort to restore confidence and tackle the credit crunch which brought the lender to its knees.
Mr King called again for a legislative overhaul to improve the UK's handling of a future crisis following the run on Northern Rock in September as, under current rules, depositors could wait for up to a year to gain savings if a bank were to fall into administration. There was a "strong incentive" for customers to join a bank run and "credible" deposit insurance arrangements were needed to reassure savers, the Governor said.
