King Still Doesn’t think Bri­tish Banks are Safe Enough

The Economic Times - - Finance & Commodities -

The UK bank­ing sys­tem is stronger than it was af­ter it al­most brought the na­tion to its knees a decade ago, but peo­ple who over­saw the crash are still fear­ful of a re­peat.

“The big les­son to me is that although banks to­day are safer than they were then, they’re not safe,” Mervyn King, who was the gover­nor of the Bank of Eng­land when the fi­nan­cial cri­sis broke out, said. His for­mer un­der­ling, Vic­to­ria Cle­land, now one of the cen­tral bank’s top-rank­ing women af­ter she was tapped to help con­tain the dam­age from North­ern Rock, says the aware­ness of risk re­mains height­ened.

King, Cle­land and oth­ers say there’s still work to do af­ter the cri­sis prompted the aban­don­ment of the so-called light-touch, prin­ci­ples-based frame­work the UK boasted about in Gor­don Brown’s days as fi­nance min­is­ter. King’s recipe to pre­vent a re-run: en­sure lenders have enough col­lat­eral in place at the cen­tral bank to jus­tify it act­ing as lender of last re­sort, restor­ing liq­uid­ity to the fi­nan­cial sys­tem.

“It is vi­tal to sort out the con­di­tions un­der which those loans will be made in ad­vance, to make sure that banks do have enough col­lat­eral or se­cu­rity to jus­tify those loans, and that it’s big enough to let the cen­tral bank re­solv­able.

The col­lapsed bank that kicked off the cri­sis was North­ern Rock, a mort­gage lender that lost its ac­cess to short-term fund­ing a year be­fore Lehman Broth­ers went bust. The big­gest res­cue was Royal Bank of Scot­land Group: even­tu­ally to­talling more than £45 bil­lion ($60 bil­lion at to­day’s ex­change rate), it was the world’s big­gest bailout.

Cle­land was posted to North­ern Rock’s base in north­ern Eng­land and re­mem­bers patch­ing to­gether ad-hoc pol­icy over pizza din­ners to con­tain the dam­age as the bank was na­tion­alised. Later, she was as­signed to Bradford & Bin­g­ley, an­other hous­ing lender taken over by the state.

“The world isn’t per­fect — there’s still a lot of work go­ing on in de­vel­op­ing bet­ter res­o­lu­tion plans and bail ins, ac­knowl­edg­ing what can go wrong,” Cle­land, who is now ex­ec­u­tive di­rec­tor for bank­ing, pay­ments and fi­nan­cial re­silience at the cen­tral bank, said in an in­ter­view. She helped set up the BOE’s Spe­cial Res­o­lu­tion Unit and also de­signed el­e­ments of the 2009 Bank­ing Act. “What’s been learned is that you can plan for a mil­lion things — but there will still be some­thing dif­fer­ent,” Cle­land said.

Mervyn King

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