Sunday, August 19, 2012

Bank of England issued warning last year that UK banking system could collapse

The Telegraph reports that before last Christmas the Bank of England's Paul Tucker warned the heads of the largest UK banks that their businesses would not survive a collapse of the eurozone.

What has changed since then?

Have the banks completely sold off all of their exposure to the EU?  Have the banks raised so much capital that they could absorb the losses on the EU exposures?

At a minimum, this confirms the needs for ultra transparency and the creation of the "Mother of all financial databases" so these questions can be answered by all market participants.

Bank of England officials were so concerned about the potential for a financial crisis late last year they took the extra­ordinary step of warning the entire banking system could collapse “before Christmas”. 
Paul Tucker, the deputy governor of the Bank of England, told an October meeting of the chief executives of Britain’s largest banks that there was a serious chance none of their businesses would survive to the end of the year. 
“Gentlemen, you could all be out of business by Christmas,” Mr Tucker said in a stark warning to the bank chiefs, according to three sources present at the meeting. 
The revelation of Mr Tucker’s remarkable warning shows the depth of fear among senior officials over the havoc the collapse of the eurozone would wreak on the British financial system.... 
Minutes published by the Bank’s Financial Policy Committee in September and December made clear the depth of its concerns, but the explicit warning given to the chief executives shows that officials feared a crisis even greater than that in the wake of the collapse of Lehman Brothers in September 2008. 
The meeting led directly to the creation of working groups at banks to gauge the potential for a full-scale collapse of the financial system. 
One executive present said his institution had been so concerned by Mr Tucker’s warning that it had re-evaluated its entire risk positions. 
It is shocking to think that the banks late last year had no idea their exposure to an EU collapse.

This is further confirmation of the need to require the banks to disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

With this data, everyone would know everyone else's exposure.
However, another executive present said he had been disappointed with the Bank of England’s response and said that, despite the dire warning, it actually did “very little” to help deal with the situation. 
The most important aspect of transparency is that it puts each market participant into a position where they can do something to help deal with the situation.  They can take action based on facts and not fear.

Finally, there is a need for financial regulators to distinguish between bankers who will not be there if losses occur and banking institutions that will not be there.

As regular readers know, banks are designed to continue to operate even when they have negative book capital levels due to the combination of deposit insurance and access to central bank funding.  While they are rebuilding their book capital through retention of 100% of pre-banker bonus earnings, the taxpayers are the bank's 'silent' equity partner.

However, there is no reason that the bankers responsible for losing the bank's book capital should continue to be employed.

No comments: