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By Emma Ann Hughes | Published May 24, 2012

Bank of England exec warns euro exits threaten UK banks

Andrew Bailey, executive director of the Bank of England, has warned that the exit of countries from the euro area would create “a cost of adjustment” for UK banks and would present a “clear threat” to financial stability.

Speaking at the Westminster Business Forum in London, Mr Bailey said last November he made himself notorious by saying banks should prepare for counties leaving the euro area, but he said that whatever happens in the euro area there would be a cost for UK banks.

Mr Bailey said that too will act as a drag on the returns earned by banks and in the worst scenario presents a clear threat to financial stability.

He said: “There is a very strong, and desirable, push to make all banks, including the largest, resolvable in the event of them approaching failure.

“Although I don’t want to count chickens at this stage, I am cautiously optimistic that we are beginning to see the making of solutions for the resolution of major banks, most likely with the bail-in of creditors as the way to end the dependence on public money.”

Mr Bailey said transferring the responsibility from the public purse to private creditors for resolving a crisis situation will improve the pricing of the risk of banks failing, adding that “it would be charitable to say that in the past governments have not properly priced the cost of ‘too big to fail’”.

He added: “Private creditors of banks will do this, as they should. I raise this because it is another important transitional element in the cost of banking.”

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