A European Bank Official, Mervyn King, Sees Darker Outlook

Mr. King, the governor of the Bank of England, urged banks to meet stricter capital requirements by paying out less in bonuses or to shareholders in dividends instead of curbing lending to the real economy. The recent step by the European Central Bank to provide the region’s banks with cheap financing will ease pressures on financial institutions in the medium term but is no long-term fix for a lending market that needs to be revitalized, he said.

“Overall conditions have worsened,” Mr. King said at a news conference in Frankfurt after a meeting of the board. “Dependence on central banks has risen and signs are intensifying that stressed financial conditions are passing through to the real economy.”

“In a climate of extreme risk aversion, investors lack confidence to continue to provide normal level of funding to financial institutions,” Mr. King said.

The E.C.B. on Wednesday pumped nearly $640 billion into the banking system on the Continent in an effort to ease the region’s credit squeeze. The amount was more than some analysts had predicted and helped to lift some concerns among investors that banks could struggle to get adequate financing. Shares in Deutsche Bank of Germany, BNP Paribas of France and other banks in Europe rose on Thursday.

Andrew Milligan, head of global strategy at Standard Life Investments in Edinburgh, said he agreed with Mr. King’s assessment that banks were generally more cautious in lending but said the markets were “still a world away from the Lehman situation where there’s a complete withdrawal of credit.”

The recent action by the E.C.B. was probably sufficient to convince investors that “banks won’t pull down their shutters in the first half of next year,” Mr. Milligan said.

Mr. King said the members of the systemic risk board, the European body set up to monitor risks to the region’s financial stability, did not discuss the probability of a member’s leaving the euro zone. Discussions “focused on the stability of the banking system and the pressure on funding,” Mr. King said.

Asked whether the board would expect banks to make contingency plans for the possibility that a country leaves the euro zone, Mr. King said that “all financial institutions are expected to prepare for a wide range of contingencies.”

Mr. King called on banks to work hard to increase their level of capital over the next six months but “not by reducing lending to the real economy.”

“Clearly conditions are difficult and we see that with the funding pressures,” Mr. King said, “but we encourage banks to build up capital when they can.”

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