Bank of England Governor: Sorry about the financial crisis

Bank of England Governor Mervyn King: should have “shouted warnings from the rooftops.” hat4uk.wordpress.com

Bank of England (BoE) Governor Sir Mervyn King today courted controversy by stating the Bank “should have” done more to prevent the UK’s banking disaster.

In an uncharacteristically blunt assessment of the Bank’s role in the financial crisis, King said that the bank should have “shouted from the rooftops” the perils Gordon Brown’s govermment faced in 2007–08.

Blame game

Nevertheless, King was careful to deflect blame from both the BoE and himself. He argued that because the Bank was stripped of its power of financial regulation by the Blair government in 1997, it lost the role of supervision to the UK Financial Services Authority (FSA).

Last week, FSA chief Hector Sants burnt several bridges by lambasting the City’s “incompetent” executives in his departure speech.

What Tony and Gordon did at school

Upon accession to office, Prime Minister Tony Blair and Chancellor Brown granted the BoE formal independence, something Margaret Thatcher, despite her attachment to deregulated markets, could not quite bring herself to do. Nor could her successor, John Major.

The trade-off in 2001 was the role the Labour government handed to the FSA, which oversaw financial services regulation and coordinates anti-money laundering (AML) programs as well as combating other financial crime.

The Financial Services Authority: no more competent than the Bank of England. uk.reuters.com

The reasons Blair and Brown had for transferring competences to the FSA and diluting the BoE’s power were clear: Labour had regarded the Bank as being too close to the banking fraternity for too long in the financial centre that is the City of London.

Moreover, in the mid-1990s, the BoE, long the Treasury’s rival, had been much more inclined under governors Robin Leigh-Pemberton and Sir Eddie George to join the embryonic Eurozone. The BoE had prepared papers for the abolition of the pound sterling and Britain’s entry into Economic and Monetary Union, despite the Major government’s antipathy towards the euro project.

But the 2007–08 global financial crisis was not the first time the BoE had blundered so badly.

On 16th September 1992, during the 1992–93 European currency crisis, the BoE spent £3.3 billion defending the pound against forex speculation, leading to Black Wednesday, when the sterling dramatically departed the EU Exchange-Rate Mechanism (ERM) after only 18 months.

Black Wednesday, 1992: £3.3 billion in Bank of England reserves lost. guardian.co.uk

Speculator George Soros netted £1 billion for betting against the sterling. The BoE dumped financial reserves – taxpayers’ money – into Soros’ coffers. The pound has never returned to the ERM.

On 5th July 1991, police raided the offices of the Bank of Credit and Commerce International (BCCI), a Luxembourg-registered, London-based and Bank of England-supervised gaggle of fraudsters, racketeers, money-launderers and arms dealers masquerading as a financial institution. The BoE was sued for £1 billion in a lawsuit that ended only in 2005.

The BoE, charged with BCCI’s supervision, could not have acted more incompetently. The depth and breadth of BCCI’s unlawful activities over almost 20 years were so extensive that the EU was forced to issue the Second Banking Directive (the so-called ‘post-BCCI’ Directive); Luxembourg was compelled to reform its “bank secrecy” legislation (which required further action on the part of the G8’s Financial Action Task Force, as Luxembourg didn’t bother complying fully); and US Congress was forced to act, introducing the US Bank Bill Amendments of 1992–93.

Den of iniquity: BCCI. money.aol.co.uk

February 23–26, 1995: Nick Leeson has fled, leaving behind the wreck of Barings Bank, the oldest merchant bank – the Queen’s bank – in England. The BoE belatedly attempts a rescue, but ultimately turns Barings over to administrators. Not entirely the BoE’s fault, but they did have responsibility for prudential supervision - which was sorely deficient.

But wait - there’s more.

This is hardly inspiring stuff from the BoE. More alarming is the fact that in 2010 the British Chancellor, George Osborne, decided to abolish the FSA and hand regulation back to the BoE.

For Governor Mervyn ‘Too Big to Fail’ King, these post-hoc admissions look far too much like a political shot at the Blair-Brown governments which, admittedly, bear enormous responsibility for the financial mess. Meanwhile, the BoE itself benefits from the aboltion of the FSA by the Conservative-Liberal Democratic coalition government and finds itself back in its ‘rightful’ position of King of the City of London.

In addition,the BoE might not have a lot of financial re-regulation to do until 2019: the Vickers Report doesn’t recommend implementation of a raft of reforms until then. And even so, Vickers is no Glass-Steagall Act.

One more thing: if you think the UK banking sector is separated from the Eurozone crisis, think again. Indeed, UK banks are inhaling European Central Bank funds as fast as they can draw breath. Some €37 billion breaths, to be precise.

But at least Chancellor George Osborne is fighting to stop France and Germany from watering down Basel III.

The last thing the post-2008 global financial sector needs is banks with even more lax minimum capital requirements.

Disclosure: Remy Davison is a Director of a Centre that receives funding from the EU Commission.