Britannia Radio

THIS IS A CRITICAL POSTING!

Gordon Brown can huff and puff but this proves that he was warned of 
a possible crisis and far from doing anything about used the time 
granted to make it worse.

This is NOT a global problem - This is Brown's personal crisis not 
least because he set up the failed regulatory system but as the man 
in control of that system - HE FAILED TO ACT!

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TELEGRAPH  30.12.08
Definitive proof that the Bank of England saw the financial crisis 
coming
Posted By: Edmund Conway

Looking back in our archives this Christmas I came across a rather 
important article which I had half forgotten about. It dates from 
2006, when the credit crisis was a mere apple in the financial 
system's eye and the City was enjoying one of its biggest booms in 
history. The article, which can be found below, reveals that the Bank 
of England knew precisely what risk was posed by the dangerous build-
up of debt which was brewing in the economy.

More strikingly, its Financial Stability Report from 2006 was as far 
as I can tell the first major institutional missive explicitly 
warning about the dangerous funding gap building up in the British 
banking system.

As we wrote in our City Comment that day: "One statistic in 
particular shows precisely how exposed the City is to the bursting of 
the household debt bubble. At the beginning of 2001, our banks were 
not lending customers any more than the total amount of deposits they 
held. By the end of 2005, banks were lending customers £500bn in cash 
which simply wasn't in the vaults. Should customers default on their 
loans, these banks could be in trouble, having to resort to borrowing 
chunks of money at penal interbank rates."

Not only did the Bank's report, lay out the City's increased reliance 
on wholesale funding - it also warned that this leaves banks 
extremely vulnerable in the event of a slowdown. Now, the Bank was 
not the first to diagnose the seeds of the crisis: there were one or 
two hedge funds which were already trading on the likelihood of a UK 
banking breakdown caused by this reliance on securitisation. There 
were plenty of commentators warning on the excessive build-up of 
debt. But as far as I can tell this was about the earliest warning on 
the problems inherent to the UK mortgage market.

The report completely debunks the notion that the financial crisis 
came as a surprise to the City, or indeed the Bank. The Government 
had been warned explicitly not by some crackpot economist but by its 
own employees in Threadneedle Street about precisely how the crisis 
could erupt. Not only this, but the report also revealed that its 
"war games" plotting out scenarios including a credit crunch revealed 
that a debt-fuelled crisis could cause a severe UK recession, a 25pc 
fall in house prices and a wiping out of a third of banks' tier one 
capital - around £40bn at the time. It is difficult to think how it 
could have made more noise about the possible risks the debt build-up 
entailed.

Of course, the eventual crisis has been far greater than even this 
worst-case scenario, but remember that this was a warning delivered 
more than a year before the securitisation markets broke down in 
August 2007. Had it been heeded in Government, Northern Rock - not to 
mention the rest of the banking system - could very possibly have 
been saved from complete collapse. The UK could have been let off 
with a mild rather than severe recession. House prices could have 
been brought back under control, rather than booming again for 
another breakneck year of growth.

But this was not to be. As it was, 2006 was the year in which the 
credit bubble was blown well and truly out of proportion. Levels of 
money growth in the economy - until then under control - started to 
balloon, and the system started rolling along the road to 
destruction. The Bank could have done more to clamp down on this 
growth. The Financial Services Authority, which as part of the 
tripartite authorities was sent copies of this report and was even 
involved in the "war games", should have done more to prevent 
Northern Rock and other lenders carrying out these policies and the 
Treasury, above all, ought to have wised up and taken the threat 
spelled out by the Bank seriously.

Last but not least, a good deal of the blame has to lie with the 
Bank's Governor Mervyn King. Although one of the best monetary 
economists the country has to offer, he clearly failed to appreciate 
the scale of these risks. He was uniquely placed to take this warning 
from the obscure financial stability wing of the Bank, then sniffily 
regarded by many as something of a backwater, and actually do 
something with it.

But instead he succumbed to the received wisdom sprouted in the City 
that securitisation - the sale of mortgage debt onto other investors 
- had reduced the risk in the banking system. This was, of course, 
completely wrong, as the Financial Stability Report in 2006 (and for 
that matter 2007) indicated, and yet he believed it enough to say, in 
the August Inflation Report press conference, only days before 
Northern Rock had to turn to the Bank for support: "our banking 
system is much more resilient than in the past precisely because many 
of these risks are no longer on their balance sheets, but have been 
sold off to people willing and probably more able to bear it. Some 
have always had a preference for a banking system in which all the 
risk is concentrated there... [but] that's a very risky system...We 
don't have a system that is as fragile as that now. The growth of 
securitisation has reduced that fragility significantly."

All of this might seem like ancient history now, two and a half years 
later. But it reveals some important lessons for policymakers. The 
first is that there was a more-than adequate early warning system in 
place here in the UK. The problem was that it was ignored. The Bank's 
financial stability experts were sending out a clarion call to the 
rest of the financial system, but as loud as it screamed, no-one - 
not the Treasury, not fellow regulators, not even the Bank's own 
Governor, paid it enough attention.
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TELEGRAPH  12.July.06
'City faces meltdown if debt crisis hits'

By Edmund Conway, Economics Editor

The City could face a financial meltdown if the debt bubble bursts, 
with over a year's worth of bank profits - £40bn - potentially being 
wiped off balance sheets, the Bank of England warns today.

The Bank is issuing a stark warning about the potential damage a 
credit crunch and a collapse in asset prices could cause to the 
economy and financial system.

It says that a sudden jump in borrowing rates - potentially caused by 
a further surge in the oil price - could cause a 2pc fall in economic 
output and wipe out banks' annual profits, estimated this year to top 
£40bn.

In a worse-case scenario, a sharp fall in credit conditions worldwide 
would have devastating consequences for Britain, the Bank warns.

It could cause a 1.5pc contraction of the UK economy, a 25pc fall in 
house prices and a 35pc drop in commercial property prices over three 
years, according to the scenarios mapped out by the Bank. Other major 
countries would suffer similar effects, it says.

It also indicates that the risks of a serious financial problem in 
the City have increased during the past six months, and investors 
would be wrong to assume that, following the market turbulence of 
past months, the worst is now over.

Although it said the financial system remained extremely healthy, 
there were six major risks that could, in certain circumstances, lead 
to serious financial trouble. To a large extent, these risks revolve 
around the record level of debt that has been built up in recent 
years by UK households and businesses.

It said a combination of these risks could create a serious crash if, 
for example, there were a sharp turn in the credit cycle, caused by 
higher interest rates.
"The severe crystallisation of credit, market and liquidity risk 
could plainly represent a serious shock to the UK financial system," 
it says.

"Such extreme scenarios could be sufficient to more than absorb the 
annual profits of the UK banking system and therefore cause some 
material erosion of capital.

"Although such an outcome is very unlikely, given its potential 
impact, it merits consideration in financial firms' risk management 
planning."

The doomsday scenario was painted in the Bank's Financial Stability 
Review, a study about how the City would react if struck by a crisis.

The vulnerability of banks to a collapse in the debt bubble is 
illustrated by the recent rapid rise in their funding gap which shows 
that in recent years the amount lent to customers that is not backed 
by customer deposits has soared. Banks are, therefore, having to rely 
much more on the wholesale money market, which tends to be far more 
expensive than customer deposits.

The Bank of England is also increasingly concerned about the complex 
and risky financial instruments devised by banks and hedge funds, of 
which little is known.

The Bank is believed to feel that many institutions using these 
instruments, such as credit derivatives, are "sitting with their 
fingers crossed, hoping that the music doesn't stop".

Another serious worry is the possibility of a global pandemic of a 
human form of avian flu, and the Bank will conduct a computer 
simulation later this year of how the City would be affected if the 
disease broke out in London.