Risk averse banks 'hamper recovery'

The painful process of repairing the finances of the sector increased the chances of a "relatively slow and protracted" recovery, bank governor Mervyn King said.

"It is likely that the supply of credit will continue to be restricted for some while, with banks being risk averse and aiming to raise capital ratios," he said.

The warning came as the bank predicted a deeper recession than in its last report in February, due to the worse than expected 1.9% fall in output during the first quarter of 2009.

It now forecasts that the annual decline in UK output could hit 4.5% at the peak of the recession this summer.

The governor said the pound's weakness, the impact of record low interest rates, government spending, and firms working through stockpiles offered hopes of recovery.

But he added that the timing and strength of a subsequent revival was "highly uncertain", particularly as bank lending would take longer to return to normal than assumed in February.

Mr King warned: "The economy will eventually heal, but the process may be slow."

He said banks - some of which have been propped up with billions from the taxpayer - were displaying an "extreme level of risk aversion" when lending to businesses and households.

They were likely to remain cautious in the short-term if they were "going to continue as a private sector entity", he added.