Bank of England Governor Mervyn King said on Thursday that the co-ordinated central bank action was only "temporary relief," as he confirmed the BoE had "contingency plans" in case of a eurozone break-up. King told a press conference that the BoE, together with Britain's government and financial watchdog, the Financial Services Authority (FSA), "are making contingency plans," although he refused to elaborate.
Last week, the FSA had already confirmed that Britain's banks were drawing up plans for the possible dismantling of the eurozone. Amid fears of a eurozone collapse, central banks of the United States, the eurozone, Britain, Japan, Canada and Switzerland said on Wednesday that they would cut the cost of providing dollars to banks.
King said Thursday that the joint move "is a step forward and will help, but let me stress that this cannot be a solution to the underlying problems. All this can do is to help with some temporary relief to liquidity problems, but liquidity problems often reflect underlying solvency problems and in this case they do and those problems have to be tackled directly by the governments involved. "Central banks... cannot resolve solvency problems, they can merely provide liquidity," he told a press conference in central London.
Although not a member of the eurozone, Britain is a key trading partner of the neighbouring bloc. King spoke as the BoE's Financial Policy Committee published a report in which it recommended that British banks "improve the resilience of their balance sheets without exacerbating market fragility or reducing lending." The central bank repeated its view in the report that banks should concentrate on raising additional capital to weather any future storm.
"Given the current exceptionally threatening environment, the committee recommends that, if earnings are insufficient to build capital levels further, banks should limit distributions and give serious consideration to raising external capital in the coming months," the report said.
The BoE had already said in September that banks should cut bonuses and shareholder dividends before building up cash reserves. And it warned on Thursday that eurozone crisis risks have increased since June, as the debt crisis threatened Italy and Spain.
"Sovereign and banking risks emanating from the euro area remain the most significant and immediate threat to UK financial stability. These risks have intensified materially since June 2011," it added. "Against a backdrop of slowing global growth prospects, market concerns about the sustainability of government debt positions of smaller economies have broadened to larger euro-area economies.