|Sir Mervyn King, Governor of the Bank of England, arrogantly believed the UK could “easily weather” a banking crisis as the storm gathered in the summer of 2007, according to a new book.
In The Alchemists: Three Central Bankers and a World on Fire, Neil Irwin, a Washington Post columnist, claimed the Governor “would remain the deepest sceptic of the severity of the crisis” almost until Lehman Brothers collapsed the following year.
Mr Irwin tells the story of how Sir Mervyn, US Federal Reserve chairman Ben Bernanke, and then European Central Bank president Jean-Claude Trichet “would create the world to come” in the five years after the sub-prime crisis struck in 2007.
Thursday August 9, 2007 is now considered the first day of the panic, after BNP Paribas closed two investment funds – triggering paralysis in the money markets and forcing the ECB to step in with a €95bn (£80bn) emergency liquidity line.
Sir Mervyn, who was watching the England cricket team at the Oval that day, was “dismissive” of the ECB’s action, Mr Irwin said.
He believed “the banking system was simply counteracting years of excess and Britain could easily weather whatever came next”. So as not to be disturbed, he left it to Deputy Governor Rachel Lomax “to represent the Bank in conference calls with his counterparts across the world”.
“Later on, King would put himself as close to the front lines of the battle against panic as anyone. But on day one, his arrogance left him in the grandstands,” Mr Irwin wrote.
Britain was unprepared for the banking crisis because the Governor “had de-emphasised regulating the banks, which he viewed as a messy legalistic business compared to the elegant intellectual work of shaping monetary policy”.
The Bank’s annual reports show that Sir Mervyn cut the financial stability budget in his first two years after taking over as Governor in 2003 as he focused on monetary analysis. Sir Mervyn’s 10 year tenure ends in June.
The UK taxpayer would ultimately provide £1.16 trillion to the banks, £132bn of which was in cash and the rest in guarantees, according to the National Audit Office.
A Bank spokesman said: “This book contains inaccuracies, unsubstantiated claims and misunderstandings. It fails to recognise, in common with many other books on the crisis, that the Bank of England was not responsible for financial regulation in the run-up to, and during, the financial crisis. That role had been removed from the Bank in 1997.
"The Governor went to the Oval on August 9 because it was the first day of his annual leave. During the day he was informed of events and abandoned his holiday.
“Far from being sceptical of the severity of the crisis, the Governor was one of the first to realise that the crisis was not restricted to liquidity, but was a crisis of solvency. And he said so publicly. The truth of that was reinforced by last week’s report into HBOS by the Banking Commission.
“Responsibility for regulation has now been handed back to the Bank, which is acting, against some resistance, to ensure that UK banks are better capitalised in order to withstand future stresses”.