In his quarterly inflation report, Bank of England governor, Mervyn King has warned that recovery will not begin until banks stop showing an “extreme level of risk aversion” when lending to businesses and individuals.

Trampling over any green shoots, the Bank of England estimated that the economy would shrink by 4.5% in the coming months and that banks could require further aid from the Government.

Whilst Mr King maintained that the previous bailouts had given the banks enough to ensure their survival, they would not begin to loosen lending criteria unless more capital was pumped into them.

“There is a big difference in practice between the levels of capital banks need to be stabilised... and those required to persuade banks to exhibit normal levels of risk-aversion.” Mr King commented. “If the banks are going to continue as private sector entities they will naturally behave in a risk-averse way for a while.”

The Bank of England also said that getting the country out of recession will be a slow process, adding that there is just as much chance of the economy shrinking next year as there is of it growing.