LONDON (AP) — The Bank of England urged British banks to build up their capital reserves, perhaps by cutting dividends or raising more cash from shareholders, to shore up their defenses against a deepening crisis in the 17-nation eurozone.
The Bank's governor, Mervyn King, stressed that the Bank was not calling for increasing capital ratios, which have already been raised by regulators following the banking crisis which erupted four years ago.
"Where there are opportunities to boost capital, take them," King said Thursday at a news conference introducing the Bank's latest Financial Stability Report.
The report pointed to sovereign debt and banking risks in the euro area as the most significant and immediate threat to Britain's financial stability.
King said "an erosion of confidence, lower asset prices and tighter credit conditions are further damaging the prospects for economic activity and will affect the ability of companies, households and governments to repay their debts, and that in turn will weaken banks' balance sheets further.
"This spiral is characteristic of a systemic crisis," he warned.
U.K. banks do not have large exposures to national debts of the euro nations but they are more exposed to private sectors in some weaker economies and have "significant exposures to major European banking systems, which in turn are highly exposed to weaker euro-area economies."
The Bank, the government and the Financial Services Authority were engaged in planning for a wide range of possible financial crisis which could affect the nation, King said. However, he ducked questions about the possible break up of the euro currency.
"There are many ways in which the future could play out. Maybe it won't break up, maybe it will continue in various forms, but maybe there will still be questions of default," King said.
"None of us really know and I don't think it makes sense to say that there is a single well-defined event against which we have to make contingencies."
The goal of the Financial Policy Committee, which produced Thursday's report, "is to insure as far as possible we make the U.K. financial system resilient so that from whichever direction the storms come — and maybe they will come from outside the euro area — but from whichever directions the storms will come that we have as resilient a banking system as we can put in place."
Though Britain has opted to keep the pound, the eurozone remains the country's biggest export market so whatever happens there will likely have a big impact.
"This is a real worry for our country," Prime Minister David Cameron told ITV television. "If it fails, if the euro fell apart, what you would see is a very steep decline in the GDP, in the economic growth, of all countries in Europe, including Britain."
King said that he, as chairman of the Economic Consultative Committee, had initiated discussions among key central bankers which led to Wednesday's market-boosting decision to make dollar loans more readily available.
"We are keen to emphasize that we are working very closely together. We see each other extremely frequently. And most important of all, we trust each other," King said.
David Stringer in London contributed to this story.