Bank of England Warns of Tough Times Ahead

The second report from the newly created Financial Policy Committee was released yesterday and warns of heavy strains on markets through the upcoming months.

The committee, which operates from within the Bank of England, advised high street banks to take any opportunity to strengthen their capital, reduce dividends and raise long term funds so as to improve their ability to absorb any damage.

While the need for a long term game plan was discussed, the meeting focused on the need for short term measures to reduce the risk of further disruption to the economy: Bank of England Governor Sir Mervyn King, who also chairs the FPC stated: “The committee recognised that dealing with the problems facing the international financial system as a whole would require long term reforms to tackle unsustainable debt positions and the cumulative and persistent loss of competitiveness in a number of euro area countries.”

“Given the scale of current risks, the need for shorter term measures to reduce risk to the supply of credit to UK businesses and individuals was also discussed.”

The most recent credit conditions survey has shown lending to businesses flat lining and only modest growth of the supply of loans to households in the third quarter of 2011. The bank pointed out that another difficult few months could lead to a major reduction in the availability of credit, and also noted that demand had fallen due to reluctance from businesses to take on new debt.

Having been created earlier in the year by the coalition government, the FPC currently only exists in an advisory capacity, but is asking to be given more power to prevent financial crises by intervening in market transactions and regulating bank activities..

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