Bank of England Warns U.K. Banks that Eurozone Crisis Poses Biggest Threat

By Linda Young

London, United Kingdom

The head of the Bank of England issued a strongly worded warning to United Kingdom banks to get their financial houses in order to shield themselves from repercussions from the eurozone credit crisis.

Although the UK is not on the euro, the crisis in the 17-member nation eurozone could seriously affect the UK.

Governor Sir Mervyn King said the eurozone financial problems posed the largest threat to UK banks. King said the eurozone crisis presented a "significant and immediate threat to UK financial stability" and could cause a second credit crunch.

He warned UK banks to develop contingency plans in case of a break-up in the eurozone.

King warned the banks to raise more funds, by cutting bonuses to staff and dividend payments to shareholders. However, he said they should not stop lending to households and businesses.

Deputy governor Paul Tucker also warned banks, saying the situation represented an exceptional peril in which conditions could degrade to allow virtually anything to happen.

King, speaking in his role as chair of the interim Financial Policy Committee (FPC), the Governor told commercial banks that they must build up their reserve funds in order to serve as increased insurance against potentially catastrophic developments in the eurozone.

While strongly advising banks to continue lending while cutting staff bonuses and shareholder dividends, the committee suggested issuing new shares to raise capital for reserves if necessary.