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King says banks must raise their capital levels

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Media captionSir Meryn King: "Creditors must acknowledge further likely losses"

The UK and other major economies will remain weak until banks have sufficient capital to absorb "likely" future losses from bad loans, the governor of the Bank of England has warned.

Sir Mervyn King said this was because the banks' current "insufficient capital" was continuing to deter them from lending to households and firms.

He added that banks needed to accept that further bad debts were expected.

Sir Mervyn said only such a change could allow economies to prosper again.

"I am not sure that advanced economies in general will find it easy to get out of their current predicament without creditors acknowledging further likely losses, a significant writing down of asset values and recapitalisation of their financial systems," he said.

"Only then will it be possible to return to a more normal provision of vital banking services so crucial to an economic recovery".

'Encouraging signs'

Speaking at an event in Cardiff, Sir Mervyn said the government and Bank of England's latest effort to boost bank lending - the Funding for Lending scheme - must be used as a "window of opportunity" to "restore the capital position of the UK banking system".

Yet he said the initiative could only be "temporary".

Under the Funding for Lending scheme, commercial banks can borrow up to £60bn from the Bank of England at a low rate of interest.

Turning his attention to the wider economy, and with the latest UK economic growth figures out on Thursday, Sir Mervyn said the economy was "barely higher than two years ago".

Yet he added that there were "encouraging signs", particularly in the jobs market.

He added that the Bank of England would "think long and hard" before it decides to increase its programme of quantitative easing (QE) from the current level of £375bn.

Under QE the Bank pumps fresh money into the banking system to try to boost lending.

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