The FSA says a lack of credit is jeopardising the whole economy
The UK's recession may be longer and deeper than expected, the UK's financial regulator, the Financial Services Authority (FSA), has warned.
It said that continuing problems in the financial sector, in particular the lack of credit available, are jeopardising any economic recovery.
The authority said that the consensus for a 2.2% contraction in 2009 may prove to be overly optimistic.
It also acknowledged that bonuses may have contributed to the current crisis.
The comments were contained in the FSA's Financial Risk Outlook.
The risks to the UK economy were "weighted to the downside and, while the effects of the fiscal stimulus and monetary easing remain unclear, the recession may be deeper and more prolonged than expected," the FSA said.
It said there was a danger of the economy slipping into a "self-reinforcing deflationary cycle," where a lack of lending forces house prices, consumer spending and business profits down, and unemployment and defaults up.
It added that businesses and consumers must plan for a "greater degree of uncertainty than normal".
The FSA also addressed concerns that the bonus culture prevalent in the City may have led to unnecessary risk taking.
It said that remuneration policies "tended to be structured with large potential rewards and limited downside risks for the employee".
"As a result, staff had incentives to purse risky policies despite exposing the institution to higher potential losses in the longer run," it added.
"In many cases, remuneration policies were running counter to sound risk management."