The Bank of England governor Sir Mervyn King has admitted the organisation could have done more to prevent the banking crisis and has renewed calls for reform in the troubled sector.
Speaking at The 2012 Today Programme Lecture in London yesterday, King (pictured) claimed the Bank was not blind to what was happening in financial markets and tried to warn that the risks in those markets were being underestimated.
He told the Today Programme: “So why, you might ask, did the Bank of England not do more to prevent the disaster? We should have. But the power to regulate banks had been taken away from us in 1997. Our power was limited to that of publishing reports and preaching sermons. And we did preach sermons about the risks. But we didn’t imagine the scale of the disaster that would occur when the risks crystallised.
“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.”
However, King failed to respond to the strong concerns over the governance of the new Bank of England structure from the Treasury Select Committee and Labour.
TSC chair Andrew Tyrie recently withdrew an amendment to the Financial Services Bill calling for stronger governance after Treasury financial secretary Mark Hoban said he would look again at the issue.
The TSC and the Bank have clashed over the TSC’s request for it to release minutes from court meetings during the financial crisis. The Bank said revealing the minutes would not allow space for private discussions in future but Tyrie said not releasing them was stopping the committee properly scrutinising the bank.
The TSC’s report on the Bank’s accountability, published last November, said it will become a super-regulator after the regulatory shake-up and called for the court to be replaced with a modern supervisory board. The bank rejected the TSC’s call for the court to be made into a modern supervisory board. Instead it proposed an oversight committee to be set up under the court, a move later backed by the government.
King said new reforms should be implemented in the future to protect the rest of the economy from failures in the banking system. These included ensuring that more of banks’ shareholders’ own money is on the line and that banks rely less correspondingly on debt.
He says: “If banks and their shareholders have more to lose, they will be more careful in choosing to whom they lend. And, when banks make losses, there is more of a cushion before the bank fails, and less chance that the taxpayer will have to foot the bill.”
From next year the Bank’s new Financial Policy Committee will have the power to regulate banks.
King says three reforms topped his list: regulation, resolution and restructure. He said it was essential Parliament passes proposals by the Independent Banking Commission, chaired by John Vickers, to prevent essential banking services and risky investment banking activities being carried out in the same too important to fail bank.
He said: “Regulation, resolution and restructuring of the banks are the three Rs of a new approach to make banking, and so our economy, safer.
“The three Rs will be central to the work of the Bank. And all of that will come on top of our responsibility for monetary policy to reduce inflation while supporting a gradual recovery of our battered economy. It’s the biggest challenge the Bank has faced for decades.”