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Mervyn King admits BoE failings and calls for reforms

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) said the BoE was not blind to what was happening in financial markets and tried to warn that risks in those markets were being underestimated.

He said: “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 committee’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 said: “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 of England’s new Financial Policy Committee will have the power to regulate banks.

King said 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 of England. 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.”

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. We must be deemed to be fit & proper and to be competent at what we do to do our jobs. This is very fair and reasonable and I dont think a good IFA has any problem with this. Might it not be a good idea to ensure that those charged with running the system follow suit. We do need regulation but it needs to be good quality regulation not more of the same stuff that allowed the FSA to fail catestrophically in the past. We need the right people in the right places at the right time doing the right thing. Something that previous senior management in FSA & BoE seemed to lack big time.

  2. Good article, shame about the poor English. ‘could OF done more’??? Chris, dear boy it is could HAVE done more. Tsk, Tsk

  3. the simple truth is that domestic mortgage lending is completely unregulated – had there been sensible regulation as to multiples of income and loan to value much of the financial crisis would have been avoided, except for those trading in the USA market (but don’t forget, Standard and Poor Triple A rated the toxic debt). the only regulation in the Financial Services and Markets Act rules is that only banks and IFA’s can sell domestic mortgages – only wolves can look after lambs.

  4. At Mervyn admits they ‘could have done more’. The real question is here what were they doing after the NR collapse but before October 2008?

    As governor of the bank he must have been able to see what was developing and that other lenders and banks would be affected by the wholesale markets drying up.This was after the event but bfore the collapse.

    But he will still walk away with golden this that and the other.In my mind he’s all cupable as Sir Fred,Hector Sants and the rest.I agree with the comment above.Totally non accountable to anyone except and powerless and toothless parliamentray committees here and there.

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