Experimental feature

Listen to this article

Experimental feature

George Osborne said poor lending decisions by British banks in the years leading to the financial crisis had had a “significant” impact on the economic recovery, days after the UK was stripped of its triple A credit rating due to sluggish economic growth.

“That has meant credit allocation has not been as efficient as otherwise it might have been,” the chancellor told the Parliamentary Commission on Banking Standards on Monday.

Mr Osborne, however, stopped short of making an explicit link between impairments on the bad loans, which required a £21bn bailout at the height of the financial crisis, and the downgrade.

He also rejected the suggestion by panel member Lord Lawson, a former chancellor, to “use [his] power and responsibility to do the classic good bank, bad bank” split of Royal Bank of Scotland, Britain’s other part-nationalised bank. He said that it would be difficult “to justify spending up to £8bn, £9bn, £10bn” to fully nationalise the lender and in “two to three years” splitting it up and reselling the good bank.

While sluggish economic growth was a major factor in the decision by Moody’s Investors’ Service to strip the UK of its triple A credit rating last week, government borrowing costs were little changed on Monday.

The pound fell to a fresh two-year low against the dollar, but later recovered and was flat on the day, trading above $1.51. “As the pound was already on credit watch from all the major agencies, the UK’s downgrade is not the torpedo to sink the pound that it once might have been,” said Paul Lambert, head of currency at Insight Investment.

Investors sold the pound this year as the spectre of lower growth and higher inflation loomed larger. Waning haven demand as the eurozone’s prospects improve has reduced appetite for sterling. “There’s no doubt our recovery from this financial crisis has been much more difficult than recoveries from more classic recessions,” Mr Osborne said.

The banking reform bill, introduced to parliament earlier this month, will enact far-reaching reforms under which banks’ retail activities would be separated from riskier investment banking divisions. The bill’s fine print, including punishments for banks that do not comply, will be decided by lawmakers in the coming months.

Asked why he had endorsed an enforced break-up for banks that failed to implement the so-called “ringfence” but not an additional “backstop” measure to break up the entire sector, Mr Osborne said he believed the idea to be “undemocratic”.

“I think this power, even with checks, would create some instability and I don’t really see what it provides,” he said. “We’ve got a system, we’ve got to make it work [and] we’ve got some powerful sanctions now.”

He also rejected calls by the commission for a British version of the US Volcker rule, which bans banks from trading on their own account.

Additional reporting by Jim Pickard and Patrick Jenkins

Copyright The Financial Times Limited 2017. All rights reserved.

Follow the topics mentioned in this article