Complacency over banks ‘risks repeat of financial crisis’

A NEW financial crisis could be on the way if the lessons of the credit crunch are forgotten and important restrictions on lending are scrapped, a Bank of England policymaker has warned.

Complacency caused the crisis a decade ago and could end up sparking the next one, said Donald Kohn, a member of the Bank’s financial policy committee.

He urged regulators “to avoid the trap of forgetting and repeating history”. “I fear memories may be fading; banks in the United States are profitable and well capitalised, and their requests for regulatory relief are falling on sympathetic ears in some quarters,” he told a conference in Denmark.

“The underlying cause [of the crisis] was complacency mixed with hubris. That mindset led the private sector to take what turned out in hindsight to be misunderstood and inadequately compensated risks, and it led regulators to be far too relaxed about what was happening.” As a result the current system in the UK is “countercyclical”, meaning regulators tighten up on banks in good years, making them set aside more capital to cushion themselves and the financial system when times get tougher.

Mr Kohn said the US should adopt a similar system and must refuse to loosen regulations in periods of strong growth and rising profits.

“Global financial stability would be better assured, in my view, if more jurisdictions, including the US, adopted a more active use of the countercyclical capital buffer – making sure that banks and other intermediaries retained enough capital in the upswing now going on to safeguard their ability to deliver essential services at reasonable prices in the next downswing,” he said.