UK banks ‘may need to set aside £150bn for bad debts’

British banks could be forced to write down up to £150 billion to cover the costs of bad debt over the next three years, one of the City's leading economists warned today.

Major UK banks have already set aside £31 billion in impairment charges in the first six months of this year, up from £26 billion in the second half of 2008.

But Simon Ward, chief economist at Henderson Global Investors, says bank debt patterns in previous downturns suggest the banks will have to write off up to £150 billion before the end of 2012, as they pay the price for poor lending decisions.

Ward predicted, however, that future losses will be covered by profits, so they won't need to go cap in hand to the Government again.

He said: "A comparison with the bad debt cycles of the early-1980s and early-1990s suggests banks will need to make further provisions of between £100 billion and £150 billion before the end of 2012.

"But more optimistically, the same group of banks made pre-impairment operating profits of £26 billion during the first half of this year.

"Providing this run-rate is maintained, cumulative profits between the second half of 2009 and 2012 should be sufficient to cover future impairments."