LONDON (Reuters) - It will take a few months still for banks to reveal their full losses arising out of subprime U.S. mortgage lending but things have improved since August, Bank of England Governor Mervyn King said on Tuesday.
In an interview with the BBC on the causes of the global financial markets crisis which prompted Britain’s first bank run in more than a century, King also said there were still risks of another shock to the economy from overseas.
“I think most people expect that we have several more months to get through before the banks have revealed all the losses that have occurred, and have taken measures to finance their obligations that result from that, but we’re going in the right direction,” he said.
Interbank lending almost completely seized up in August as financial institutions worried whether others’ balance sheets could cope with losses made in the U.S. mortgage market.
King denied that his refusal to join other central banks in trying to kickstart lending by injecting huge sums of money into the financial system had exacerbated the crisis and caused the run on Northern Rock, the country’s fifth-biggest mortgage lender.
“The role of the Bank of England is not to do what banks ask us to do; it’s to do what it’s in the interests of the country. And we took the view that bailing out those banks that have taken the biggest risks will provide no incentive in the future to prevent this happening all over again,” he said.
“They (the major banks) have the ability to cope with this crisis — not without losing money, not without losing bonuses and in the case of individuals, not without losing their jobs — but nevertheless, it isn’t a threat to the banking system as a whole.”
But King, still facing considerable criticism for his handling of the crisis, said there were lessons to be learnt and perhaps he should have communicated his position better earlier.
He rejected, however, the notion that Northern Rock would have been okay if it could have availed itself of extra liquidity provided by the European Central Bank, given it needed about 25 billion pounds to carry on.
“If you look at what the ECB lent to banks through their auctions that they conducted, relative to the size of the banking system they lent an average of 230 million pounds per bank participating in their auctions. Northern Rock needed something closer to 25 billion pounds,” he said.
Some critics have also blamed King for halting a takeover of Northern Rock by Lloyds TSB before the mortgage lender had to seek emergency funding from the Bank.
But King said the bank had wanted a 30 billion pound loan at the Bank’s main lending rate for about 2 years to fund the bid, which was not the business of central banks, and in any case it was Chancellor Alistair Darling’s final decision.
The Treasury said the story that Darling had vetoed a plan was wrong. “There was a general inquiry as to whether the Bank of England might provide commercial banking facilities of up to 30 billion pounds at non-penalty rates for up to two years, in the same way as an investment bank,” a spokesman said.
“In any event, this general inquiry was not followed up with any detailed proposal.”