The first report from the UK’s new stability watchdog, the Financial Policy Committee, has warned that the economic problems experienced by several Eurozone countries are a risk to UK banks, even if they have no direct links.

It is thought that UK banks have relatively little exposure to Greek debt, but they have lent significant amounts of money to French and German banks that have in turn lent to Greece.

So a default by Greece would obviously end up being passed on to UK banks.

Sir Mervyn King the Governor of the Bank of England and one of the founder members of the FPC said. "Experience has shown that contagion can spread through financial markets especially when there is uncertainty about the precise location of exposures. A UK bank could have lent to a bank that itself had lent to a bank in turn was exposed to sovereign risk."

Sir Mervyn said that this was a different scenario to the Lehman Brothers collapse, which led to the credit crunch, but did say that the uncertainty over any particular bank’s exposure to risks such as Greek debt could cause a new funding problem.

The FPC, backed by the Prime Minister David Cameron, has said that the banks should build up reserves while they can to cover future problems and that the FSA should oversee them to ensure this happens. This would mean that banks would have to be more transparent about their exposure to risk. But one would think that the banks’ auditors are doing all this already?

I’m with James Sinclair on this one. “If you think that the banking system of the western world is strong enough to guarantee the debt of the western world, you’re totally out of your mind. That’s the reason they’ll do everything possible to paper over the Euro crisis to prevent the defaults in order to prevent another crisis in banking that definitively would occur, that absolutely would occur from a default. This fact is ravingly positive for gold. You would have a complete collapse of the western banking system if Greece goes down.”


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