Speaking on the BBC Radio 4’s Today programme this morning Davies, who has also been deputy governor of the Bank of England, said there were two options to help protect value for taxpayers as the Government moves to sure up the banking system.
He said that one option was for the Government to buy up under valued mortgage assets that banks cannot currently afford to hold but which might be able to generate value at a later stage.
The second option was for the Government to buy up stakes in banks in order of between 10 and 20 per cent in order to send a signal to the market that it is behind the institutions.
He said that such a move might prevent the need for full-scale nationalisation of further institutions at a later stage and which removes them from the open market and can make them less competitive and harder to sell on when markets return to normal.
Davies also warned that the decision of the Irish and German governments to guarantee deposits will force other Eurozone countries to follow suit. He said it was unfortunate that European countries have had to adopt this “beggar my neighbour” approach.
Davies does not believe it will even solve the financial problems the countries are facing as the real issue is lack of wholesale funding.
He said: “I actually think that the retail deposit point is not the crucial one because what is really of concern is that banks remain reluctant to lend to each other and it is the wholesale markets that are the real problem.”
He added: “I suspect that if countries like Germany are going to guarantee all deposits, if that is really what they are doing, then there probably won’t be much choice but for firms and certainly Eurozone countries to do the same.”
But Davies does not believe that guaranteeing deposits will address the root cause of the problem, which is the lack of lending in the wholesale markets.
Davies said he would favour a different approach using convertible stock.
He said: “I think governments are going to have to take a leaf out of the Warren Buffet book. Buffet, with Goldman Sachs invested convertible stock. He did so on the basis that it could convert into common equity in the long run, so if the bank stabilised he could buy it back but he would make a profit by doing so. I feel that Governments are going to have to do something like that in order to signal to the wholesale markets that they stand behind those institutions and that the Government has got some skin in the game.”