The Bank of England has joined financial regulators in warning banks of the risk of heavy lending to telecoms companies.

The warning, contained in the Bank's latest six-monthly Financial Stability Review, comes in light of the very high prices telecoms firms are paying for third generation mobile phone licences in the UK and Germany.

The Bank noted the companies' heavy financing needs and said returns were "some way in the future".

It said awareness of the risks involved in lending to the sector had risen and "some but not all" banks had started to monitor or limit their exposure to the sector.

Tough choices

The Bank said lenders faced tough choices between risk and relations with corporate clients and urged regulators and other financial authorities to share information on the subject.

In an article in the review, the bank said: "One risk is that the income generated from the new [3G] technology may be lower than expected, and insufficient to service the borrowing.

"There are also risks that the handset technology may take longer than expected to develop and that the 3G technology may become obsolete more rapidly than anticipated."

However, the bank said, there was "clearly also a significant potential upside".

Margins squeezed

The UK's Financial Services Authority had already issued a similar warning to banks about telecoms debt.

But earlier this week, a senior official at German mobile phone company Mobilcom played down the threat posed by 3G to telecoms firms' finances, saying the expense of establishing services would be much less than initially expected.

This was partly because the companies were succeeding in squeezing the margins of their suppliers, it was claimed.

Auctions of 3G mobile phone licences had raised billions of dollars more than expected for the UK and German governments earlier this year.

But other European auctions mostly fell flat as doubts mounted about the value of the licences.