King worried banks helping struggling customers – for the wrong reasons - The Guardian (blog)

Sir Mervyn King has given a hint about one topic that will be discussed at Thursday's press conference to discuss the Bank of England's list of threats to the financial system.

On Tuesday he discussed at the Treasury select committee the use of "forbearance" by banks to help customers in difficulty to schedule their loans.

"Bad forbearance is where the banks don't insist on repayment not because they care about their customer but because they're worried about the implications for their own balance sheet, given the accounting conventions under which banks operate," he said.

"That is undoubtedly a concern, because the issue is – this is the fundamental question we'll come back to on Thursday – to what extent are the balance sheets giving an accurate representation of the underlying position of the banks?"

The Financial Policy Commission – the new outfit set up inside the Bank to help prevent another 2008 banking crisis – has discussed in the past whether forbearance is potentially storing up problems for the industry. It now looks likely to the return to the topic again.

Investors argue that one reason the share prices of the banks are lower than the value of their assets is because they are nervous about a potential wave of bad debts in the future.

Clarity on this subject would be welcomed by investors – as would any further detail on the amount and type of capital that banks must hold to withstand any meltdown in the eurozone and the UK economy.