Financial Services Authority said that Britain is at risk of a deeper than expected recession as a dearth of bank credit exacerbates falls in house prices, consumer spending and business investment. It added that while economists on average expect Britain's economy to contract by 2.2% this year before returning to growth in 2010, the weakened banking sector meant this forecast may prove optimistic.

FSA said that "The risks are weighted to the downside and, while the effects of fiscal stimulus and monetary easing remain unclear, the recession may be deeper and more prolonged than expected. These self reinforcing cycles exist in any economic downturn, but the crucial danger in the current crisis is that weakness in the banking system could stimulate and reinforce them."

It said that it remained unclear whether government intervention to prop up the banking sector, including its GBP 37 billion bailout of three leading banks in October would work.

Mr Adair Turner chairman of FSA said that FSA and other regulators had failed to anticipate the banking sector's problems. He added that "We all recognize that the ability to see big systemic problems coming has been imperfect. One of the things we have to get right is better macro prudential analysis which identifies when there has been big build ups of risk."

Mr Turner said that the report would also look at whether some banking bonus packages tend to produce an unnecessarily short term focus.

(Sourced from www.reuters.com)