King warns banking sector may need more bailouts

The Governor of the Bank of England warned yesterday that more money might have to be pumped into the crisis-stricken banking sector, as the Government said it was insuring toxic loans worth more than £300bn for the Royal Bank of Scotland.

Mervyn King also launched a thinly veiled attack on the Government's high levels of public debt ahead of the credit crunch and revealed that the Bank of England is poised to embark on quantitative easing. His comments will raise fears that the UK banking sector and wider economy faces a long and painful road to recovery and that further banking bailouts may be required.

Giving evidence before MPs on the House of Commons' Treasury Select Committee, Mr King said it was "impossible to say" how much capital may be required to prop up the fragile UK banking sector, as it was dependent on the state of the global economy. "How much capital banks will need in the end is impossible to tell," Mr King added.

Mr King said it could take "many months" to identify the scale of the toxic assets held by banks and that the Government and the regulator were unlikely to reach a definite conclusion because "it was a situation that was constantly moving". He added it was crucial to "find out what is really on the balance sheets of our major banks".

The Governor told MPs that UK plc's debt levels before the credit crunch limited the scale of the Government's financial stimulus package. Mr King said: "I do think public debt matters. We get to this crisis with levels of borrowing that were too high and that made it difficult."

Mr King told the MPs that the Bank expected to start quantitative easing, the so-called printing-money option, "in the next few months" when it would start to buy up assets to boost the money supply. But he warned: "We are not going to allow a great inflationary surge. The problem at present is not that the amount of money in the economy is growing too rapidly, threatening an inflationary surge, it's that the amount of money in the economy is growing too slowly."