The collapse of Northern Rock and RBS, and the rapid sale of Alliance and Leicester and Bradford and Bingley were worrying and unusual events. Pictures of people in queues trying to withdraw their money from Northern Rock have become the iconic pictures of the most severe financial crisis to hit the UK since the 1930s or even longer.
The typical explanation is that these banks went down thanks to the greed of their senior executives and the “City”. The Regulators had only a bit part, it is argued, as they had been rendered ineffective by “light touch” regulation. Testosterone fuelled lending was reacklessly pursued in the interests of earning more bonus, paid on profits taken long before the full outturn of the lending was known. It was a rotten City model. The answer is ban or tax bonuses, put in much stronger regulation, and buttress banks with large increases in capital in case they do it all over again.
Recalcitrant facts get in the way of this comfortable explanation for the politicians and regulators who presided over this mess. Surely the main aim of all the regulation in place should be to stop just such a crisis happening? If the regulators thought they lacked the powers they should have asked the government to do something. If the government thought the regulations were too light they should have taken action. In the UK, after all, the whole system of banking regulation was revised and new under the incoming Labour government.
The truth is the regulators had the powers to demand more cash and capital under the law as it stood. It was their call. They decided that they could allow the ballooning of balance sheets. They resisted anyone who argued for less debt in the economy, buying into the thesis that banks could now manage risk much better.
It is also true that in the UK the Labour government was keen for understandable reasons to promote large banks from parts of the country that had not traditionally flourished in the financial service area. The two largest ones that got into difficulties were from the North and from Scotland. Their rapid growth had full government support. The Bank of England allowed it to happen,no doubt understanding the political pressure for it to happen.
The FSA has apologised for its part in all this. It had the prime responsibility for individual banks. The Bank of England, however, should not excape all blame. It was a central part of the tripartite arrangements for regulation. It had a duty to keep the system safe. The problems at troubled banks soon upset the system in a major way. It had the ability to monitor and the duty to understand the consequences of expanding bank balance sheets on money and inflation. It is difficult to say it did well in these areas. When RBS got into trouble, its balance sheet was larger than the entire annual GDP of the UK. Surely the Bank had to take an intelligent interest in its solvency and liquidity, as it was so crucial to the whole system.