Did the Bank of England cry wolf?

 
bank of england

The Bank of England made history over the autumn and earlier this year.

Its newly created Financial Policy Committee announced that the big UK banks were short of capital to protect themselves against potential future losses and then quantified that gap as £25bn that needed to be raised by the end of this year.

Never before had any British regulator, let alone the Bank of England, been so public and explicit about the weaknesses it perceived in the banking system.

The expectation was created that dramatic evasive action would be taken to mend our banks - especially the two perceived to be weakest, Royal Bank of Scotland (RBS) and Lloyds.

In the event, after weeks of negotiation with their day-to-day supervisor, the Prudential Regulation Authority, RBS and Lloyds won their argument that there isn't some great black hole in either of them.

They both won the right to continue what they had already been doing to strengthen themselves - namely to offload non-essential assets and shrink riskier activities.

But nothing symbolically important is being sold that wasn't going to be sold anyway.

And - most significantly - the most dramatic thing any bank can to do raise capital, namely to sell new shares, isn't deemed to be necessary (and see my note of yesterday for more).

Which rather creates the impression that the seemingly dire warnings of the Bank of England and its soon-to-retire governor, Sir Mervyn King, about the capital shortages in UK banks were either a bit overdone or haven't been followed through effectively.

Whichever version of events is correct, neither burnishes the Bank of England's reputation as it flexes its newly acquired powers to boss the banks.

The notion that the Bank of England can be a bit alarmist about the health of the banking system has the potential to confuse bank customers, at a time when their confidence is still dented from the great crisis of 2007-8.

And the alternative view - that the banks still aren't recovered properly but remain brilliant at running rings around their supervisor and disguising the extent of their weakness - well that would be more disturbing.

The credibility of banks and of central banks, such as the Bank of England, is more or less all they have. So when the credibility of the regulated and the regulator rub up against each other, as seems to have happened, that is not altogether benign.

 
Robert Peston, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    +29

    Comment number 19.

    Given that the Muppet Mervyn King orchestrated this are you surprised?
    This is the guy who oversaw the greatest banking disaster ever, has crippled everyone by the stealth tax called inflation and has destroyed a generation of savers by ably demonstrating that the key to success is borrow, borrow then borrow some more.
    We reward him with a knighthood and a £250,000 index linked pension.

  • rate this
    +24

    Comment number 7.

    I have absolutely no faith in the Bank of England. It failed to monitor the UK banks activities prior to the financial crash, it failed to predict or warn us of the crash and it has got virtually all its financial predictions after the crash wrong. In any other walk of life King would have got the push for failure

  • rate this
    +17

    Comment number 4.

    - 40 months of overshooting the inflation targets.
    - A continuous stream of growth forecasts that always failed by being too high (a clear indicator of bias: flipping a coin would've hit the mark more often).
    - No meaningfull growth after printing more than 1/3 worth of our GDP in new pound.
    - Ever more Moral Hazard and Capital Misallocation in banking.

    The BoE still has credibility!???

  • rate this
    +16

    Comment number 24.

    There can be no credibility without accountability.

    PPI: massive scam, nobody punished.
    Libor: massive scam, nobody punished.
    Money laundering: massive scam, nobody punished.

    Please do not talk about credibilty when they are already cooking up their next scam, knowing full well that nobody will get punished for it anyway.

  • rate this
    +12

    Comment number 13.

    Thank god for the bank of England, looking out for the best interests of us all.

    They've consistently hit their inflation target, always maintained political independence and dealt with dubious banking practices swiftly and effectively. Also that Mervyn King seems a really nice bloke.

    NOT.

 

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