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The UK banking system is stronger than it was after it almost brought the nation to its knees a decade ago, but people who oversaw the crash are still fearful of a repeat.
“The big lesson to me is that although banks today are safer than they were then, they’re not safe,” Mervyn King, who was the governor of the Bank of England when the financial crisis broke out, said.
His former underling, Victoria Cleland, now one of the central bank’s top-ranking women after she was tapped to help contain the damage from Northern Rock, says the awareness of risk remains heightened.
King, Cleland and others say there’s still work to do after the crisis prompted the abandonment of the so-called light-touch, principles-based framework the UK boasted about in Gordon Brown’s days as finance minister.
King’s recipe to prevent a re-run: ensure lenders have enough collateral in place at the central bank to justify it acting as lender of last resort, restoring liquidity to the financial system.
“It is vital to sort out the conditions under which those loans will be made in advance, to make sure that banks do have enough collateral or security to justify those loans, and that it’s big enough to let the central bank lend enough money to prevent a bank run and collapse of the system,” said King, who was succeeded by Mark Carney in 2013 and has now returned to academia.
For Carney — who is among those who criticise crisis-era policy makers for having been overly concerned with the dangers of moral hazard — major lenders still can’t be resolved without drawing on taxpayers’ funds.
The governor has said many times that until the debt securities destined to restock the equity of a collapsed bank are fully in place, banks won’t be fully resolvable.
The collapsed bank that kicked off the crisis was Northern Rock, a mortgage lender that lost its access to short-term funding a year before Lehman Brothers went bust.
The biggest rescue was Royal Bank of Scotland Group: eventually totalling more than £45 billion ($60 billion at today’s exchange rate), it was the world’s biggest bailout.
Cleland was posted to Northern Rock’s base in northern England and remembers patching together ad-hoc policy over pizza dinners to contain the damage as the bank was nationalised.
Later, she was assigned to Bradford Bingley, another housing lender taken over by the state.
“The world isn’t perfect — there’s still a lot of work going on in developing better resolution plans and bail ins, acknowledging what can go wrong,” Cleland, who is now executive director for banking, payments and financial resilience at the central bank, said in an interview.
She helped set up the BOE’s Special Resolution Unit and also designed elements of the 2009 Banking Act.
“What’s been learned is that you can plan for a million things — but there will still be something different,” Cleland said.
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King still doesn’t think British banks are safe enough
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