Bank of England: Bailout bill hits £1trillion

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he Bank of England has issued a dire warning about the crippling taxpayer costs of the financial crisis.

Mervyn King
King hell: Mervyn King said banks still face a black hole in their finances.

Just two days after its governor Mervyn King's lacerating attack on the Treasury, the Bank warns a further, even more radical overhaul of the stricken banking system may be needed.

In its bi-annual Financial Stability Report, the Bank calculates a breathtaking £1.26 trillion of public funding has already been pledged to support the City.

But it warns that banks remain too financially feeble to bolster lending to normal levels. And any additional infusions of public money could impose dangerous pressures on governments' finances.

In a blow to Gordon Brown, the report also found that the debt and housing bubble that preceded Britain's crash was even worse than in earlier banking crises in other countries.

It also criticises City institutions that it sees as being too big and complex - putting it at odds with Treasury policy. Mr King has expressed concerns about firms that combine high street retail operations with higher-risk investment banking, arguing such activities should be separated.

The report suggests 'limiting the scope of banks' businesses to a narrower range of relatively low-risk activities'.

The Bank finds there have been improvements in the 'resilience' of City lenders but says UK banks 'inevitably remain vulnerable' and face a possible £500bn black hole in their finances between now and 2013.

One obvious response might be to pump more public money into banks. Yet the Bank of England warned there are limits to the Government's ability to prop up the banking system, because its own finances are under such intense pressure.

The analysis suggested that market worries about the scale of the national debt could drive up the Government's cost of borrowing and adversely affect the entire financial sector.

Underlining that point, the Bank released a survey of City investors and dealers showing that fears of a Government debt default are dogging the markets for the first time. Some 26% are worried about this occurring, yet no one said this in last year's survey.

The Bank also warned rising unemployment could push yet more homeowners over the brink. The number of people in arrears on their mortgage is likely to double to 333,000, the report predicted.