By Daniel Hunter

Sir Mervyn King has said that the UK, and other major economies, will remain weak until banks have sufficient capital to absorb "likely" future losses from bad loans.

The Bank of England Governor, said this was because the banks' current "insufficient capital" was continuing to deter them from lending to households and firms. Although that stance was contested by several business owners on Tuesday.

King went on to say that banks needed to accept that further bad debts were expected, and that only such a change could allow economies to prosper again.

"I am not sure that advanced economies in general will find it easy to get out of their current predicament without creditors acknowledging further likely losses, a significant writing down of asset values and recapitalisation of their financial systems," he said.

"Only then will it be possible to return to a more normal provision of vital banking services so crucial to an economic recovery."

Sir Mervyn said the government and Bank of England's latest effort to boost bank lending - the Funding for Lending scheme - must be used as a "window of opportunity" to "restore the capital position of the UK banking system".

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