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.

Start Quote

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.

Start Quote

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
    0

    Comment number 131.

    "Sir Mervyn King rejects criticism for cricis."

    In the words of Mandy Rice-Davis, "Well he would, wouldnt he?"

    What more would you expect of a person in his position?

  • rate this
    +6

    Comment number 130.

    we will always be in a mess until we stop our "leaders "! from falling over backwards for big business who only want big profit with as small a workforce as poss , so they can pay out lovely bonus and shares ! & for allowing jobs to go abroad while we still pay and feed people who come here with nothing but expect everything .the eu is a disaster for us , but a gravy train for mps . to many Freds

  • rate this
    +2

    Comment number 129.

    I have worked in financial services for over 20 years and the level of regulation has never has been as overbearing, often pointless & frequently mismanaged. However the irony that this financial mess was allowed to happen does not escape anyone in my profession.

    Sorry Merv but the BOE FSA and some of Nu labour policies are very much to blame.

  • rate this
    +2

    Comment number 128.

    @119 - I hope that made sense in your head, 'cos it didn't out here.

  • rate this
    0

    Comment number 127.

    It is a fact that the Bank of England were stripped of their regulatoruy function by Labour! It is a fact that when express concerns were raised in 2006 about the very issues mentioned in the article, the acting Treasury secretary Ed Balls said: "nothing should be done to put at risk a light-touch, risk-based regulatory regime". The FSA clearly blame individuals in Labour for lack of regulation!

  • rate this
    +3

    Comment number 126.

    More "buck passing", which seems to be endemic in this day and age.

  • rate this
    +2

    Comment number 125.

    @112 Mr Max
    In 1977, the Bank set up a wholly owned subsidiary called Bank of England Nominees Limited, (BOEN), a private limited company, with 2 of its 100 £1 shares issued.
    Bank of England Nominees Limited was granted an exemption by Edmund Dell, Secretary of State for Trade, from the disclosure requirements under Section 27(9) of the Companies Act 1976

    So it is owned by the government?

    No!

  • rate this
    +8

    Comment number 124.

    I am happy bankers are blamed as they symbolise the system. But the real causes run deeper than the banks or governments & politicians. If the bankers had prevented so much debt it would have just brought the crisis forward by decades. We should reject a system run for the profit of 1% at the expense of 99% so that growth is an end in itself but only got via toxic personal and other debt!

  • rate this
    +2

    Comment number 123.

    It's all very well saying what the banks should have done in 2006-2008, but whether people would have supported that at the time is another matter. I suspect that had the banks been more cautious, large sections of the public would have been up in arms when 125% mortgages went off the market.

    Reckless lenders must take a lot of the blame, but so should the reckless borrowers.

  • 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.

  • rate this
    +3

    Comment number 121.

    King is an economic buffoon.

    Every time he opens his mouth he proves it once again.

    He says there was a debt bubble - BUT HE SEEMS UNABLE TO UNDERSTAND THAT THE DEBT BUBBLE IS REFLECTED DIRECTLY IN ASSET PRICE INFLATION. WHAT AN IDIOT!

    It is this asset price inflation that is still destroying the nation.

    His 'solution' is to continue easing credit that CAUSED the problem - he is an idiot!

  • rate this
    +71

    Comment number 120.

    I remember well Merv warning several years ago about the level of borrowing in the UK. Nobody was interested as they were too busy borrowing money. The banks can't blame the Boe for their own failings,

  • rate this
    -11

    Comment number 119.

    Cosmic Gazette's Comic of the Day: "It was the system's fault." Ya hallol.
    Try again proper, messenger, mwuhaha.
    ..where are all savings from the biggest recent sixty years, golden taps and kindergardens? brainy times, deficits no sane mathematician starts thinking upon. More infos to the topic would be useless. A millenium bug though might think up ey trick. "ItAlien reboota", cricket, yo ;)

  • rate this
    +40

    Comment number 118.

    Make no mistake this banking system is fraud.
    It's not an accident that the people end up with all the debt while the elite end up with the assets of a country.

  • Comment number 117.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this
    +6

    Comment number 116.

    "No one is to blame" whines Mr King, Your wrong Mr King people are to balme and they must be held accountable for the decisions they took which has nearly bankrupted the country. That includes you, the FSA, Politicians and bank exectutives, every single one of you should accept their part in this mess!

  • rate this
    +14

    Comment number 115.

    the gravy train won't stop as the banks fought years to get on it and will try their best to stay on it,,

  • rate this
    +35

    Comment number 114.

    This is a bit rich coming from King, this happened under his watch and therefore he should accept the blame. He is richly rewarded for the job he is employed to do and he hasn`t done it very well. In other walks of life he would managed to help him improve his performance and if he didn`t improve he would be let go. But that`s the real world, not the one King and MPs inhabit

  • rate this
    +2

    Comment number 113.

    "Laughing all the way to the bank" - I wouldn't mind all this criticism if I had a few billion pounds to play with!

    The Government, under the bank of England, created an environment in which banks increased their profits by billions at our expense. Can we now have an organisation like the Bank of England to do the same thing to put money in our pockets?

    If not, why not?

  • rate this
    +3

    Comment number 112.

    80. Brian

    Contrary to popular belief, The Bank Of England...which is entitled to issue cash...then lend it and charge interest to the government...is essentially a privately owned business with profit making shareholders whose identities are kept secret from the general public."
    -

    BoE was nationalised in the 40's.

    There are no "secret shareholders".

 

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