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”

End Quote

"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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  • Comment number 531.

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

  • rate this
    +2

    Comment number 530.

    King spoke of a bust without a boom prior to the 2007 crash - no we did not have surging employement, no we did not have soaring prices of food and commodities but Sir Mervyn, if you were shouting about anything from the rooftops, it should have been the way the credit explosion (fed by moral hazard) had fuelled an unsustainable property bubble.

  • rate this
    +1

    Comment number 529.

    "Failure of the system".

    Yeah Merv, like a Predator drone getting court-martialed for killing Afghani civilians...

    http://www.youtube.com/watch?v=2vupiwJyK1w

    Makes perfect sense!

  • Comment number 528.

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

  • Comment number 527.

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

  • rate this
    +3

    Comment number 526.

    492 I agree the banks had to be bailed out at the time, however, what should have followed is a good culling of the people that caused the crisis in the first place- and replaced with people who could see a better of way of running things. Perhaps now the 'loans' would have been paid back and not gone into the pockets of the people who are 'ruining' the still currupt banking system.

  • rate this
    +3

    Comment number 525.

    As Mira points out 97% of money was created by the banks (not the BoE) as debt. Not enough people understand this. We have been playing a monopoly game where all the printed money ended up with a few players, and to address the lack of money, the rich players have allowed us to use IOUs as cash, and for these to circulate as money. The £2.50 you just bought a coffee with is someone else's debt...

  • rate this
    +1

    Comment number 524.

    433. Flankerman
    2 HOURS AGO
    This comment was removed because the moderators found it broke the house rules. Explain.

    The lefties at the BBC are out in force today. I merely suggested an apology from that last government was in order for their part in the UK's financial downfall.

  • rate this
    +2

    Comment number 523.

    I recommend and earlier read by Robert Peston

    http://www.bbc.co.uk/news/business-16413230

  • rate this
    +2

    Comment number 522.

    486.Roddy - "I dream of a world without money."

    A notionally attractive idea, but it just would not work in practice - most of don't have anything anyone else wants & in turn most people have nothing we want, so a bartering system would not be of much use to most of us.....any other system, such as vouchers or something, would just money by a another name.....

  • rate this
    +1

    Comment number 521.

    The BoE were culpable - interest rates should have been used to slow the obviously unsustainable boom in borrowing and house prices. They also could have restricted the money supply. Of course, this wouldn't have been politically popular and they would have been under pressure to maintain the status quo. They simply buried their heads in the sand.

  • rate this
    +1

    Comment number 520.

    423. Boro Jonesy

    The process by which fractional banking creates money is by definition exponential
    -----
    Increasing deregulation has allowed the pin striped marauders to invent evermore fanciful conjuring tricks.
    They didn't understand CDO's so, presumably, they're going to confused to the power of 3 where cubed CDO's are being traded.

  • rate this
    +1

    Comment number 519.

    Comment 120, an editors pick no less, removed! What a complete farce!

    I have more respect for King than i do for many others in this blame game.

  • rate this
    -2

    Comment number 518.

    If all else fails, blame the banks!

    The banks didn't.....

    Run up over a £trillion in govt. debt

    Destroy the nations pension system, adding another £trillion in debt

    Drive 1.5+ million British manufacturing jobs to China and replace those jobs with a benefit culture.

    Sell our gold reserves for next to nowt.

    The banks didn't!

    BROWN DID.

  • rate this
    +4

    Comment number 517.

    Why do governments borrow money from privately owned central banks and pay interest that is the question. Governments have the ability to create money and pay no interest so why don't they? The banks they borrow from create the money from nothing so the inflation arguement is nonesense. We are being ripped off.

  • Comment number 516.

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

  • rate this
    +3

    Comment number 515.

    Crikey - looks like the moderators are on some sort of purge. I am a Zulu!

    Can this comment last longer than the time that Merv the Swerve spent trying to reign in irresponsible lending?

  • rate this
    +3

    Comment number 514.

    We are a nominal democracy - we get to vote but we can change nothing that's meaningful.

    Clear legal cases to answer for the banks and water companies but we are limited to making comments on forums like this. Ordinary people are simply a commodity, our whining is tolerated because they know it will lead nowhere.

    Why so many removed comments? Obviously some difficult things being said.

  • rate this
    +5

    Comment number 513.

    Far too many comments are being removed, i do not for one moment believe so many break "house rules" no matter which side of the debate.

    Kings hands have always been tied by the actions of other institutions, and if he had used some of the methods required to help sort things, a bigger collapse could very easily have resulted. Why do some interests want ONE MAN blamed instead of the whole system?

  • rate this
    +1

    Comment number 512.

    #425 "A completely innocuous posting on this subject was removed by the moderators. if no political content is permitted on the day of elections - which I'm guessing is the reason - then why not tell us?"

    Try posting something critical of the Wicked Witch of 1979. The BBC will fast track it.

 

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