The deputy governor said in the medium term several things have to happen to not let a Global economic credit crisis happen again.
Gieve said more work has to be done between nations when an institution goes into meltdown, like Lehman Brothers earlier this year.
He said: “If we do not tackle this we will see the growth of national restrictions on the terms on which cross-border operations are permitted – in terms of capital, liquidity and legal structure – and that could have great economic costs.”
He also highlighted the need to reassess Basel II and liquidity requirements of banks. He said: “The events have shown up the lack of any agreement on liquidity requirements on banks. The FSA is developing proposals for UK, which will deliver tougher standards. But we are pressing also for international agreement in the Basel Committee. Events also brought home the need for a fundamental review of both the amount and the definition of capital requirements.”
Gieve said new capital requirements need a growth-based component: “This component could be linked either to the economy-wide growth rate of a particular type of business, or to the growth rate of an individual bank’s lending relative to the market as a whole.
“This would make it more expensive for banks to expand their balance sheets faster that normal when confidence is high and could be a useful means of dampening banks’ contribution to the business cycle.”
Gieve pointed to the Spanish system as a means to support the upturns and downturns of the banking cycle: “The Spanish system of dynamic provisions, which requires banks to build a general reserve that can be drawn on in downturns. Each period, banks are required to make general provisions equal to the difference between the ‘inherent’ losses, based on the growth of loans and a long-term average of incurred losses, and the specific provisions on impaired assets for the period.”
“Overall there has been some easing in the money markets and some repair in confidence,” he said, “but we are clearly not out of the woods yet. We must be ready to take further action if required whether monetary, fiscal, or directly in the financial sector.”
Also, Gieve admitted that further rate reductions may be necessary, but said that a lot hinged on whatever the Government may announce next week in the pre-Budget report.