Sir Mervyn King admits Bank should have "shouted" about risk

Sir Mervyn King, the Governor of the Bank of England has admitted that repairing the economy and managing the regulation of UK banks is the "biggest challenge the bank has faced for decades."

He admitted for the first time that the Bank of England had been slow to read the signs in 2007 of the severity of the financial crisis that was about to engulf the UK and the global economy.

In a speech for the 2012 BBC Today programme lecture on Wednesday, Sir Mervyn said that the bank did warn about the risks on the horizon but that they did not imagine the scale of the problems that would emerge "when the risks crystallized."

He said the Bank "tried but should have tried harder" to argue its case that the banks should have been recapitalized quicker and by more.

He also argued that the decision by the Financial Services Authority (FSA) to remove the power of the central bank to regulate banks was a mistake. It meant that had a limited brief on which to publish reports and "preach sermons."

In his speech he said: "Although far from clear at the time, the later decision to remove from the Bank of England the power to regulate banks would return to haunt us."

Sir Mervyn went on to say that the Bank of England had urged the then Labour government to agree to a major recapitalisation of the banking industry in early 2008, but that this had been rejected because "it wasn't a popular message."

Sir Mervyn accepted that the Bank's warning should have been more strident. He said: "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."

Defining the problems that caused the financial crisis, Sir Mervyn said: "In a nutshell, our banking and financial system overextended itself. That left it fragile and vulnerable to a sudden loss of confidence."

Sir Mervyn then went on to try and define some lessons that could be learnt. He said that there were three main lessons.

"Three reforms top my list. The first concerns regulation of banks. Next year, the responsibility for regulating banks will return to the Bank of England.

Secondly, "We need to ensure that more of banks' shareholders' own money is on the line, and banks rely correspondingly less on debt.

"The third reform is to restructure the banking system. In so doing we must recognise the crucial distinction between essential banking services to people like you and me, on the one hand, and complex and potentially risky trading activities, on the other.

Sir Mervyn urged the Chancellor, George Osborne to press ahead with banking reforms and to ensure that retail banking is separated from investment banking.

However, there has been some criticism of Sir Mervyn King's version of events.

MPC member Andrew Sentence tweeted last night, saying, "Disagree with Mervyn King that fin crisis was bust without a boom. See chart attached - it was just a very long boom!"

A former member of the Bank of England's Monetary Policy Committee (MPC), David Blanchflower also disagreed with the Governor's analysis.

He said: "If Mervyn King had thought more regulation was important he could've done something about it. And because he didn't he must take responsibility for the fact the Bank of England missed the biggest financial crisis in a century."

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