BoE warns the worst is yet to come

26 November 2007

The Bank of England's (BoE) chief economist has warned that the writedowns that British banks have so far seen as a result of the credit crunch are only the start of the crisis within the UK's banking industry.

Speaking to the Liverpool Daily Post, Charles Bean said that the losses reported by banks have so far are "only a relatively small fraction" of the fallout from the US sub-prime market crash.

"It is quite likely that, over the coming months, there will be more revelations to come out, not necessarily just in this country," Mr Bean said, predicting "lots of volatility" in coming months.

He said that it would take a long time for the banking world to return to "a full state of normality".

"What matters particularly to us is the impact on the economy at large," Mr Bean said of the Bank.

"It is reasonable to expect lenders to be more cautious in extending loans whether to households or riskier lending to businesses, maybe some mergers and acquisitions, maybe the commercial property market may be particularly hit," he advised.

He added that the pressures created by the development of China and India would also be likely to remain for some time. "The key question will be the extent to which the supply of those commodities can expand to meet the increasing demand from emerging economies," he concluded.

These comments come after a warning from Goldman Sachs that banks would be likely to withdraw lending to the tune of $2,000 billion in the wake of the sub-prime crisis.

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