Sir Mervyn King rejects criticism for crisis

 

Sir Mervyn King says banks should "retain profits as a cushion against possible losses"

The governor of the Bank of England, Sir Mervyn King, has rejected blame for the financial crisis.

His comments came in an interview on BBC Radio 4 on Thursday, following his delivery of the annual Today Programme Lecture on Wednesday.

"My main point was not to try to blame anyone - this was a failure of the system," he told BBC Radio 4's Today Programme.

But there has been some criticism of Sir Mervyn's version of events.

In his speech, Sir Mervyn said: "With the benefit of hindsight, we should have shouted from the rooftops that a system had been built in which banks were too important to fail, that banks had grown too quickly and borrowed too much, and that so-called 'light-touch' regulation hadn't prevented any of this."

But David Blanchflower, a former member of the Bank of England's Monetary Policy Committee, accused Sir Mervyn of being "disingenuous".

"If Mervyn King had thought more regulation was important he could've done something about it. And because he didn't he must take responsibility for the fact the Bank of England missed the biggest financial crisis in a century," he told BBC Radio 5 live.

BBC business editor Robert Peston said that Sir Mervyn had blamed a range of other people.

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Maybe the stable door is being shut at last. But as Sir Mervyn approaches the end of his decade as arguably the most influential figure in the British economy, I expect the debate will run and run about what role he had in leaving the stable door open”

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"He blamed the recklessness of banks; he blamed a collective 'failure of imagination' to see that banks' huge increase in lending was the mother of all dangerous bubbles waiting to burst; he blamed the last Labour government for stripping the Bank of England in 1997 of its direct powers to regulate banks."

'Mistakes'

Sir Mervyn was keen to talk about the new institutions that have been put in place by the Bank of England since the crisis.

"Where the mistakes were was in not having enough policy instruments to deal with the imbalance," he said.

"What we have now is a new financial policy committee at the bank that will be able to add to the instruments, so that when we see one part of the economy going ahead too quickly the financial policy committee can target that."

He conceded that the Bank of England might have been slow to react, but excused himself on the grounds that UK interest rates had still been relatively high.

"We were certainly late to the game in understanding the scale of the fragilities in the banking system and the potential consequences when the risks materialised, but we were in good company. It was not the case that people were saying 'gosh, you really should raise interest rates to slow down what's happening in the banking sector'," he said.

Three Rs

Sir Mervyn said that three reforms topped his list: regulation, resolution and restructure.

"When, as it will, the economy returns to normal, our role will be to take away the punchbowl just as the next party is getting going," Sir Mervyn said.

The biggest risk to banks at present, he said, was from the troubles in the eurozone, which were "far from over".

"That's why we've been pushing for banks to pay out less to their shareholders and employees and instead retain profits as a cushion against possible losses.

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Dealing with the consequences of our 'bad banking situation' is likely to be a long, slow process”

End Quote Sir Mervyn King Bank of England governor

"We need to ensure that more of banks' shareholders own money is on the line, and banks rely correspondingly less on debt. If banks and their shareholders have more to lose, they will be more careful in choosing to whom they lend."

He acknowledged that from time to time a bank would fail, so the Bank of England needed to ensure that one could do so safely.

A resolution mechanism is needed - a special legal framework that would allow a failing bank to continue to provide essential services while its finances are being sorted out.

"It's precisely what was lacking when Northern Rock failed in 2007, leaving nationalisation as the only alternative," he said.

Finally he re-iterated his support for the recommendations made by the Independent Commission on Banking, chaired by Sir John Vickers, on restructuring the banking system.

The main idea concerns ring-fencing High Street banking operations so that they have their own financial cushions in case something goes wrong with the rest of a bank's operations, such as at its investment bank business.

"It's vital that Parliament legislates to enact these proposals sooner rather than later," Sir Mervyn said.

Having been governor since 2003, Sir Mervyn will leave the Bank of England next year when his second five-year term comes to an end.

Paul Tucker, a deputy governor at the Bank of England, is tipped to replace him.

 

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  • rate this
    +4

    Comment number 535.

    I dont know about anyone else but my income is generally constant which means i can budget what i will spend with that income and make sure some is parked for a rainy day.

    Is running a country so different? Surely we ascertain an approx income from tax etc and do the maths to make sure what is spent doesnt exceed that amount. Any left overs at the year end use to pay off some of this debt

  • rate this
    +7

    Comment number 509.

    If you're not part of the solution, you're part of the problem. The issue isn't with banks paying out too much to shareholders they're paying out way too much in salary and bonuses to a select group of employees. But what do you see? Sacking low-paid service staff, trying to increase customer charges and retaining high-salaries and rewards of those in upper management. Nothing changes, Mervyn.

  • rate this
    +6

    Comment number 485.

    An economy built on public borrowing and house prices alone is bound to founder. At the start of all this furore it was estimated that each household in this country had approximately £35000 of debt excluding mortgages. This was, and is totally unsustainable, I remeber individuals borrowing against their houses to buy cars, this was def a no brainer cars depreciate more quickly than anything else

  • rate this
    +5

    Comment number 475.

    For many years people had been saying that house prices were out of kilter with wages and value but they were told not to rock the boat. The BoE even said borrowing was too high and unsustainable but again they were told not to burst the bubble in case UK plc fell behind. The failures were due to blind idiocy of the banks and their traders/ lenders.

  • rate this
    +27

    Comment number 122.

    Lower the cost of living and people will spend, save and create growth. Banks will do better over time, business' will be able to create jobs. Folk won't spend all their money as they will be working. What's not logical about that? The taxman will get what they get and hopefully create a more stable future.

 

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