Homeowners turmoil warning

Homeowners are facing misery thanks to the financial excesses of recent years. That’s the gloomy prediction from Bank of England governor Mervyn King.

Mr King has warned that “when the party ends, some innocent bystanders may lose their homes altogether”.

He said the credit crisis was not over yet and added: “We are passing through the most prolonged period of financial turmoil that most of us can remember.” Mr King’s gloomiest assessment to date of British homeowners’ prospects are unlikely to be welcomed by ministers.

The Governor said: “If banks feel they must keep on dancing while the music is playing and that at the end of the party the central bank will make sure everyone gets home safely, then over time, the parties will become wilder and wilder.

“That might not matter were the consequences limited to the party-goers. But they are not. When the party ends, some innocent bystanders may lose their homes altogether.”

Following the Northern Rock crisis, policymakers are grappling with the problem of how to allow a badly-run bank to fail without undermining the stability of the wider financial system.

Mr King – who has previously criticised the City bonus culture for encouraging financial risk-taking – said it was not easy for banks or authorities to resolve the problem because of the incentives to continue in the same manner.

Although too much regulation could mean there were “no parties worth going to”, requiring banks to hold more capital could act as a “shock absorber” and strike a balance between burdensome regulation and excessive risk-taking, he added.

Former Wolverhampton Grammar Schoolboy Mr King’s speech to the British Bankers Association last night also included details of how he believes financial regulation and supervision can be improved, promising to make financial stability a key priority in his second five-year term of office.

The Governor welcomed the proposal by Chancellor Alistair Darling for the launch of a Financial Stability Committee.