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Mervyn King: another financial crisis is certain

The man who headed the Bank of England during the credit crunch fears the financial system is on the brink of a fresh disaster.

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by Dylan Lobo on Feb 29, 2016 at 07:52

Mervyn King: another financial crisis is certain

The man who headed the Bank of England during the credit crunch fears the financial system is on the brink of a fresh disaster.

Mervyn King (pictured), who was Bank of England governor between 2003 and 2013, believes regulators have failed to resolve the root of the problem with banking sector.

In his new book The End Of Alchemy: Money, Banking And The Future Of The Global Economy, serialised in the Telegraph, King said the credit crunch – which was triggered by the collapse of Northern Rock in 2007 – was the fault of the system rather than greedy central bankers.

'Without reform of the financial system, another crisis is certain, and the failure to tackle the disequilibrium in the world economy makes it likely that it will come sooner rather than later,' Lord King wrote.

‘The crisis was a failure of a system, and the ideas that underpinned it, not of individual policymakers or bankers, incompetent and greedy though some of them undoubtedly were.’

King is critical of the ‘tripartite’ system of financial regulation created by former Labour chancellor Gordon Brown. The system split supervision between the Bank of England, the Treasury and the Financial Services Authority and failed to protect the financial network, according to King.

‘A major failing before 2007 was that the monetary policy framework designed to deal with good times and the lender of last resort framework for bad times were not properly integrated,' King commented.

‘In the crisis, massive support was extended not to save the banks but in order to save the economy from the banks.’

King believes the best way to fix the problem is by raising productivity and through major reform of the banking system.

‘Only a fundamental rethink of how we, as a society, organise our system of money and banking will prevent a repetition of the crisis that we experienced in 2008,’ King said.

King's comments come at a sensitive time. The Bank of England recently released new rules on the amount of capital British banks must hold in reserve against emergencies but these have been criticised as insufficient by Sir John Vickers, who headed an independent commission into the sector after the financial crisis.

Their clash came at a time of increasing concern that the government has gone 'soft' on banks by reducing their levy and dropping an inquiry by the Financial Conduct Authority into banking culture.

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19 comments so far. Why not have your say?

Who can believe in Lords & Ladies & their rotten system?

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Has Mr King just launched his book?

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Not worst the ink written with?..., but probably good enough for Gordon Brown!

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Mervyn King appears to have overlooked his failure to anticipate the financial crash before 2008. Why his predictions should have any more weight now beats me. Worse he's forgotten the five years he had after the financial crash to fix the things he's talking about now. The Bank of England and the Financial Services authority are in place to protect us from cock ups like the one we are recovering from now. When do they get prosecuted for negligence?

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If he is blaming the failure of his organisation and two other organisations to cooperate with each other, how much of that is something he feels was a personal failure?

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What was he doing? He is partly to blame. He had 10 years !!!

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Good point David, this is nothing more than headline grabbing to boost the sales of his book.

If he'd written, "every-things peachy and we are doing quite well"

the media wouldn't have given him half a paragraph on page 17.

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He's written a book if he didn't say anything controversial how many copies would he sell?

Nothing new here I suspect. The only person that anticipated the financial crash was Vince Cable, and look what happened to him :).

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"King said the credit crunch – which was triggered by the collapse of Northern Rock in 2007 – was the fault of the system rather than greedy central bankers."

So King, what caused the credit crunch? Do you not remember that it was the banks' hidden exposures to US mortgage debt which meant that no bank knew whether the other was solvent?

And who wrapped up and traded this toxic debt and paid S&P to rate it AAA? It was the greedy bankers of course. Those directly involved in this mortgage-generation process knew it would explode, but hoped the party would last long enough for them to make a killing. And some incompetent banking Execs never understood the nature of these CFDs which were quite simple if one looked at the detail.

I am amazed that King does not acknowledge this, so I can only conclude that he has lost his marbles.

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Fred Goodwin and other greedy bankers were responsible how he never had his collar felt is beyond me

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The King Is Dead - Long Live the Rest Of Us!

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A member of the "Group of Thirty" (see Wikipedia) is not likely to blame central bankers when:

a) He/they *are* "the system"!!! The irony is crushing.

a) He epitomised the encouragement, failure and resurrection of a debt fuelled society.

c) He is still part of a group of... central bankers that encourage even worse, delusional debt fuelled societies than pre-2008 - relentlessly robbing the prudent to reward the feckless who happily pile on debt.

Of course there will be another crash - but it won't be a mistake - it will be far more considered and engineered than that. If anything, the label of incompetence is the best possible cover for something potentially far more sinister.

A selective but very apt photo - the man chooses not to see the wood for the trees.

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King is right. Greedy Bankers could have been greedy greengrocers in another market. The process of grading your debt according to 'risk' as defined by Moodys, S&P and the rest was probably a greater contributory factor than bank director's behaviour. Then don't forget the greedy investors (that's you and me) who delighted in seeing the price of bank shares soar ever upwards giving banks the collateral to launch their disastrous strategies.

The Government and the FSA (now FCA) did a lot of political stuff to deflect their own failures onto Bob Diamond, Fred Goodwin and Co., and judging by most of the comments above, they succeeded.

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The biggest fraud was Gordon Brown trying to convince us he had no hand in the crisis, and when it did kick off act like a knight in shining armour.

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I worked for the RBS Group and can safely say it was a failure of regulation and sheer greed.

Selling off assets to maintain unrealistic dividend payments demanded by institutional shareholders that in turn gave the executives massive bonuses and inflated their pensions too.

I'd wager it was the same for other banks. It was a vicious circle and many people were equally responsible. It was a massive collective failure to act prudently or maybe it was cowardice?

After all, who would want to be the first Bank to tell the analysts that their business could not sustain the unprecedented levels of growth and ever increasing need for efficiency (i.e. fewer frontline staff on even lower pay)?

It was abundantly clear when RBS took over NatWest that they didn't have a clue about running an organisation of that size.

Bigger is NOT better when it comes to these organisations. Too many places to hide problems, pass the buck etc.

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Can anyone find a copy of the 2007 Northern Rock report and accounts? I saw a copy after NR collapsed and remember thinking that if the regulators had understood what NR was doing they should have shut it down for new business. My memory is that it showed reasonable 11% plus tier 1 capital ratio, but in the notes it revealed a system of assets held off balance sheet that told a very different story and should have alerted regulators.

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Why is no one blaming the arch villain Gordon Brown who was on top? The most incompetent Chancellor we ever had, by a mile?

How he dares show his face again from time to time is beyond me and he happily financed ever war Tony Blair got us into. He makes me utterly sick.

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Read up Frank read up. GB was as culpable for the financial crisis as the bankers at many levels.

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Mar 06, 2016 at 16:15

Notice which banks were trading the collateralised mortgage obligations and so on before the Northern Rock issue. These were the retail banks. This was new business for them. They thought that they could delve into the business which was at the time being handled competently by investment banks. Unlike these, the fact was that they did not have the skills to analyse and manage the risks. They lost track of what was due from whom, so how could those so-called assets be priced accurately? It is actually very basic to anyone who is competent. It is interesting to note also that PPI was also the retail banks and widespread too. LIBOR may have been more general amongst banks but in reality it could only have been individual dealers colluding and possibly with knowledge of their superiors but the many regular bank workers would have had no influence on any rates.

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