Mon, Mar 07, 2011 page10

• UK faces risk of new financial crisis

  CHOPPY WATERS: The Bank of England’s Monetary Policy Committee meets this week but remains split, three of its nine members voting to raise the interest rate last month

  • Bloomberg
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  Bank of England Governor Mervyn King reiterated that the UK faces the threat of another financial crisis if the banking system is left unreformed and criticized the industry’s focus on short-term profit.

  “The problem is still there,” King told the Daily Telegraph when asked if there could be a repeat of the financial crisis. “The search for yield goes on. Imbalances are beginning to grow.”

  A Bank of England spokeswoman confirmed the comments and said that they reiterate previously stated views.

  King’s persistent concern about the banking industry follows an agreement between British Prime Minister David Cameron’s -government and financial institutions to curb bonuses for UK-based employees. Barclays PLC chief executive officer Robert Diamond told lawmakers in January that it’s time for banks to end “the period of remorse and apology” and start rebuilding confidence.

  “Why do banks in general want to pay bonuses?” King said.

  “It’s because they live in a ‘too big to fail’ world in which the state will bail them out on the downside.” Good businesses “keep a clear vision of who their customers are, and are run by people who don’t think they should simply maximize profits next week,” he said.

  King praised the attitude of -British manufacturers, and said that they have a more “moral” approach, according to the Telegraph.

  “They care deeply about their workforce, about their customers and above all are proud of their products,” he said.

  With banks, “there isn’t that sense of longer-term relationships,” and if it’s possible “to make money out of gullible or unsuspecting customers, particularly institutional customers,” they think “that is perfectly acceptable,” King said.

  He also criticized the “weight put on the importance and value of takeovers” and the destruction of companies with good reputations for short-term gain, the Telegraph said.

  British Deputy Prime Minister Nick Clegg weighed in behind the governor.

  “I agree with Mervyn King yesterday that the job of making our banks safe and responsible is not yet complete,” Clegg told a conference of his Liberal Democrat Party in Perth, Scotland. “I understand why people are angry when they hear about the super-sized salaries and bumper bonuses awarded to top bankers. I am too. But I also want people to understand just how much this government has done to limit banking excess and get the banks lending again.”

  British Chancellor of the Exchequer George Osborne, who was addressing his own Conservative Party’s conference in Cardiff, Wales, made no reference to King’s remarks.

  The British Bankers’ Association, the lobby group for UK -financial institutions, released an e-mailed statement to say its members disagreed with many of the governor’s views.

  “The banking industry recognizes that some of its number got it badly wrong during the crisis,” said Angela Knight, the BBA’s chief executive officer. “The industry has reformed radically. We work closely with our customers of all sizes and types and in doing so have created one of the largest financial centers in the world,” she said.

  King has repeatedly called for changes to banking regulation to prevent a repeat of the crisis and stop any institution becoming “too big to fail” and requiring a taxpayer bailout.

  Osborne is seeking to abolish the UK’s financial regulator and hand most of its authority to the central bank. That may take effect in 2013 as King’s second five-year term as governor expires.

  “The risks are well controlled, and all banks have put recovery and resolution plans in place to answer the too-big-to-fail question and so safeguard customers and the taxpayer against the remote consequences of any future failure,” Knight said in the BBA statement.

  King and the rest of the Bank of England’s Monetary Policy Committee will meet this week at a time when the panel is split four ways. Three of its nine members sought to raise the benchmark interest rate last month to keep inflation in check.

  King reiterated that raising rates too soon would be a “futile gesture,” though he said that there is a “perfectly reasonable case for doing it now.”

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