Time to Repair Banks....How Long???

LONDON (Dow Jones)--Bank of England Governor Mervyn King said in a newspaper interview that U.K. output has stabilized, but that it is important not to get carried away by signs of growth. In the interview with regional newspaper the Newcastle Journal, published Thursday, King reiterated that it will take a long time to repair banks' balance sheets, adding that "radical" change is needed in that sector. He also said the weakening in sterling will support a necessary rebalancing of the U.K. economy. "Output has stabilized. There are some signs that growth may be beginning to pick up. But we shouldn't get too carried away by this. This is clearly very small growth after a very large fall, and unemployment has risen, so it's a difficult challenge ahead," King is quoted as saying. He added that the most important thing is that policymakers have managed to stem sharp declines in output. "I think the U.K. is pretty well set for a recovery, but the banking sector is not in good shape and it will take a long time before the balance sheets of the banks are fully repaired and the ability to provide credit to the economy to finance expansion will be returned to normal," he is quoted as saying. King said there needs to be radical change in the banking sector, but that it is more important to consider why people felt able to take such large risks leading up to the crisis, rather than whether the activities they engage in are socially useful. In a speech Tuesday, Financial Services Authority Chairman Adair Turner said the watchdog will increasingly question whether financial services firms are delivering their vital services in an efficient and risk-controlled fashion. "The fundamental question we have to ask is why is it that taxpayer- guaranteed funding to banks is being used to finance risky transactions?" King said. "You don't have to make judgments about whether something is useful or not, you can recognize that it doesn't make sense to provide guarantees for people to take big risks." King said global imbalances have been one of the underlying causes of the financial crisis, and stressed the need for China and other Asian countries to reduce their surpluses and the U.K. to reduce its deficits. "That rebalancing of the U.K. economy that I have been talking about for about 10 years, is very necessary. I think the fall in the exchange rate that we have seen will be helpful to that process, but there's no doubt that what we need to see now is a shift of resources into net exports, whether directly or in producing things that compete with imports that help to reduce the trade deficit," he is quoted as saying. A separate article in the Northern Echo newspaper reported King as reiterating that the government needs a credible plan to return the U.K. to fiscal sustainability, but that the timing will depend on the pace at which the economy recovers. "What we need is a credible plan for how the budget deficit will be reduced," King was quoted as saying in response to audience questions during his visit to the north of England.