Bank of England calls for cuts in dividend, bonus

Warning that the cost of borrowing was set to soar and ''given the current exceptionally threatening environment'', the Bank of England (BoE) called on lenders to ''limit distributions'' – code for bonuses and dividends.

The bank also suggested they raise fresh equity through share sale – a move, that analysts say, would necessitate injection of more taxpayer funds into the banks or make it that much more difficult to recover the £66 billion already invested by the state in Royal Bank of Scotland (RBS) and Lloyds Banking Group.

The warning came following central banks across the world initiating co-ordinated action to ensure European banks could secure the funding needed to survive.

According to Sir Mervyn King, BoE governor, there were ''signs of a credit crunch already in the euro area''.

He said he did not think it had begun yet, one could see how it would come through if funding costs were to continue to be remain at levels they were at. He said, banks everywhere were being affected by what was happening in the euro area and if those problems could be resolved there was no reason why there should be a credit crunch.

The bank said however, that though British lenders were not at the epicentre of the crisis, they were still at risk due to their exposures to the European financial system and investors' concerns about their European loan book. UK banks are exposed to the tune of £181 billion to European banks, and £295 billion to European companies.