Repairing the economy and regulating banks is “the biggest challenge the Bank [of England] has faced for decades,” Sir Mervyn King said on Wednesday in a speech in which he conceded for the first time he should have “shouted from the rooftops” about risks before the financial crisis.
Giving a lecture for the BBC, the bank’s governor conceded that it had missed the growing signs of fragility in the economy because it thought that controlling inflation was sufficient for a stable economy and failed to imagine the “scale of the disaster that would occur when the risks crystallised”.
His speech fell short of establishing an internal or external review into the failures of the BoE before and during the crisis. Unlike the Treasury and the Financial Services Authority, which have both published analyses of the lessons learnt following the crisis, Sir Mervyn has refused to sanction an official reflection on the BoE’s performance.
He pledged that the BoE would regulate the banking system better than the FSA had after 1997 and called on the government to restructure banks by introducing legislation to implement the findings of last year’s Independent Commission on Banking.
“Successful regulation means understanding and guarding against the big risks, not compliance with ever more detailed rules,” Sir Mervyn said. “That means focusing on the wood not the trees, looking not just at individual banks but also at how their fortunes are tied together with other banks and with the rest of the economy.”
Speaking on BBC radio on Thursday morning, Sir Mervyn again refused to instigate a widespread internal review of the BoE’s performance before and during the crisis, although he said he would be happy if the government were to establish a review of the whole regulatory system.”
He also conceded he had been slow to understand how the crisis was developing: “Knowledge of financial history has been crucial and I wish I had turned to it sooner”.
Sir Mervyn’s pledge to understand the big picture repeats a commitment he made in a pre-crisis interview with the Financial Times. “The trick is to see the wood for the trees. If there is a major crisis, there’ll be a wood,” he said in January 2005, a commitment that did not prevent the crisis building.
The BoE had been preaching about the risks in the financial system before the crisis, the governor said, but admitted the BoE could have done more. “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,” he said.
Sir Mervyn addressed the delays to the provision of liquidity by the BoE in 2007 unlike the speedier action by other central banks, saying that a faster response would not have made much difference. “From the start of the crisis, central banks provided emergency loans but these amounted to little more than holding a sheet in front of the emperor to conceal the nakedness of the banks,” he said.
The BoE gains new powers for banking supervision and system-wide financial stability next year. Sir Mervyn sought to reassure the public that the BoE would not become an over mighty citizen without sufficient checks or balances. “In everything the Bank does, I and my colleagues are conscious that we are accountable to you [the public],” he said.
Because this statement was not matched with any commitments to change the governance or accountability of the BoE, it is unlikely to satisfy critics of the legislation going through parliament.
MPs on the Treasury select committee from all parties and Ed Balls, shadow chancellor, remain concerned that the BoE’s governor has too much power and that oversight is too weak.