BoE should have given stronger crisis warning - King

By David Milliken and Sven Egenter | May 3, 2012 3:19 AM IST

LONDON - - Britain's economy is recovering more slowly than hoped from a financial crisis which the Bank of England should have warned about more forcefully, BoE Governor Mervyn King said on Wednesday.

The central bank chief, giving the first peacetime radio lecture by a BoE governor since 1939, also defended Britain's policy mix of ultra-low interest rates and tough government austerity measures.

King, whose tenure as governor ends in just over a year, admitted the Bank had failed to properly identify and warn about risks facing banks in the run-up to the 2008 crisis.

"We did preach sermons about the risks. But we didn't imagine the scale of the disaster that would occur when the risks crystallised," King said.

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"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 continued.

But King also noted that the Bank had been stripped of the power to directly regulate banks in 1997 - something that will be reversed next year, around the time of his departure, when the Bank will once again be Britain's top financial regulator.

This has prompted concern from lawmakers who monitor the Bank, who worry it has not learnt enough from the crisis, and risks being unwieldy and unaccountable in future.

The central bank and its governor have also been criticised for not spotting the crisis early enough and for reacting too slowly.

King acknowledged that the central bank should have tried harder to persuade everyone of the need to recapitalise banks sooner and more extensively.

INFLATION TOO HIGH

Britain's economy contracted by more than 7 percent during the 2008-09 recession and its budget deficit ballooned to one of the highest in the world, at more than 11 percent of GDP, as it picked up the tab for banks on the brink of failure.

King drew parallels to the depression-hit 1930s, also playing recordings from the central bank governor at the time, Montagu Norman, and U.S. President Franklin D. Roosevelt.

Now the biggest danger for British banks came from the euro zone debt crisis. "The present crisis is far from over, as events in the euro area illustrate weekly," he said.

"Dealing with the consequences of our 'bad banking situation' is likely to be a long, slow process."

King did not discuss the outlook for monetary policy. This is a major question ahead of the central bank's next decision on May 10 as Britain's economy has tipped back into a shallow recession since the Bank indicated last month that it was reluctant to do further quantitative easing.

But King said he was worried about inflation, which is well above the Bank's 2 percent target at 3.5 percent after rising in March for the first time in six months.

"Our own economy is still not back to health. Although inflation has fallen back in recent months, it is still too high. And despite efforts to stimulate the economy, the recovery is proving slower than we had hoped. It will come," King said.

The Bank governor said the government had struck the right balance when tackling the country's huge budget deficit.

"It is important to have a really credible plan that markets believe in, that you will deal with these deficits, not too quickly so that you destroy growth, but that you will deal with them," he said. "We are striking that balance."

The pace of deficit reduction is a contentious political issue, with the opposition Labour party arguing that the spending cuts imposed by the Conservative-led coalition government has pushed the economy back into recession.

In the longer term, King said future generations would ask whether current British policymakers had done enough to stop a future financial crisis.

It was vital that parliament enacted proposals to stop banks which were 'too important to fail' because of their role in handling payments and everyday loans from engaging in speculative investment banking activities, King said.

Banks also needed to rely more on shareholders' money rather than debt, and hand over less of their profits to shareholders, he added. And although British banks with few overseas interests could be wound up easily if they fell into trouble, there was no international agreement on how to deal with a failure by a large, multinational bank.

King said that the Bank was up to the task of taking charge of the stability of Britain's financial system, though some decisions would make the central bankers unpopular at times.

"When ... the economy returns to normal, our role will be to take away the punchbowl just as the next party is getting going. That won't make us popular among bankers, politicians and even at times some of you - and it's not supposed to."

(Reporting by David Milliken; Editing by Michael Roddy)

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