Difficult economic times ahead: FSA

Saturday, 9 August 2008 12:00 AM

Financial Services Authority (FSA) chief executive Hector Sants has urged consumers and the financial sector to prepare for difficult economic times.

In an interview with the BBC, the head of the UK banking sector's regulator said he hadn't expected economic problems in the market to be so severe upon taking over.

He said: "I was expecting, if you like, a more conventional correction that followed the patterns of a straightforward downturn. This has clearly been far more than that, we've seen massive disruptions of the financial markets, particularly liquidity problems which were not anticipated."

In the interview, Mr Sants urged banks and consumers to be more prudent with their finances over the next few months.

Asked whether financial conditions were as bad as in the recession of the early 1990s, he said he expected banks to "plan on that type of assumption".

He added that he had been "fairly forceful" in conversations with banks over the need to raise capital to make up for their losses.

Responding to a question over how long he felt the credit crunch would last, Mr Sants replied that he could not forecast the end of the problems but warned of further economic disruption ahead.

The head of the banking watchdog said there was a "possibility of real economic downturn, continued difficulties in credit markets" and further declines in house prices across the country.

Last summer, defaults on risky US subprime mortgages led to firms being increasingly wary of lending to each other. Financial institutions kept their cash and became more cautious of lending to each other resulting in less liquidity in the markets.

The financial problems over the last year has seen the collapse of one of the US' biggest investment banks, Bear Sterns, and the nationalisation of Northern Rock.

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• economy
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• economy and finance