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| Version 2 | Version 3 |
|---|---|
| Governor attacks City risk-taking | Governor attacks City risk-taking |
| (about 2 hours later) | |
| The governor of the Bank of England, Mervyn King, has criticised City banks who reward staff with huge sums for taking risks. | The governor of the Bank of England, Mervyn King, has criticised City banks who reward staff with huge sums for taking risks. |
| He told MPs on the Treasury Committee that the credit crisis was caused by bankers betting on high-risk complex financial products. | He told MPs on the Treasury Committee that the credit crisis was caused by bankers betting on high-risk complex financial products. |
| Mr King criticised their managers, who he said did not understand the complicated instruments. | Mr King criticised their managers, who he said did not understand the complicated instruments. |
| They would have to do better if they wanted to keep their jobs, he said. | They would have to do better if they wanted to keep their jobs, he said. |
| The governor, who faced criticism for the Bank of England's response to the credit crisis and the collapse of Northern Rock, said managers awarded bonuses that encouraged risk-taking. | |
| Their pay structures were too closely linked to the short-term results of investments rather than long-term results. | Their pay structures were too closely linked to the short-term results of investments rather than long-term results. |
| I think all of us - and I do not exclude the Bank in this - have learnt a lot of lessons from the last nine months Mervyn King, Bank of England governor Analysis: King hits out | I think all of us - and I do not exclude the Bank in this - have learnt a lot of lessons from the last nine months Mervyn King, Bank of England governor Analysis: King hits out |
| "Banks have come to realise they are paying the price for having designed compensation packages that provide incentives that are not in the long-run interests of the banks themselves." | "Banks have come to realise they are paying the price for having designed compensation packages that provide incentives that are not in the long-run interests of the banks themselves." |
| Mr King said the risky financial instruments were "based on some very poor assumptions". | Mr King said the risky financial instruments were "based on some very poor assumptions". |
| Many of the world's largest banks have lost large amounts on these complex financial products, whose design meant investors underestimated or misunderstood the risks involved. | Many of the world's largest banks have lost large amounts on these complex financial products, whose design meant investors underestimated or misunderstood the risks involved. |
| He said those banks which decided not to invest in these instruments - which were being described as "innovative, exciting activities," - were "often pilloried for being boring". | He said those banks which decided not to invest in these instruments - which were being described as "innovative, exciting activities," - were "often pilloried for being boring". |
| "We must make sure it doesn't happen again," Mr King said. | "We must make sure it doesn't happen again," Mr King said. |
| "I think all of us - and I do not exclude the Bank in this - have learnt a lot of lessons from the last nine months," the governor said. | "I think all of us - and I do not exclude the Bank in this - have learnt a lot of lessons from the last nine months," the governor said. |
| Restoring confidence | Restoring confidence |
| Earlier this month, the Bank of England announced a plan to enable banks to swap potentially risky mortgage debts for secure government bonds in order to relieve a credit squeeze. | Earlier this month, the Bank of England announced a plan to enable banks to swap potentially risky mortgage debts for secure government bonds in order to relieve a credit squeeze. |
| Mr King said the most recent crisis was not down to a lack of funds in the market - so-called liquidity - but was a result of a lack of confidence that meant banks were unwilling to lend to each other. | Mr King said the most recent crisis was not down to a lack of funds in the market - so-called liquidity - but was a result of a lack of confidence that meant banks were unwilling to lend to each other. |
| As a result, banks have been restricting lending to homeowners. | As a result, banks have been restricting lending to homeowners. |
| But the governor was keen to stress that the Bank of England's plan to loan £50bn was not a 'bail-out' of the banks and was not designed to stimulate mortgage lending. | But the governor was keen to stress that the Bank of England's plan to loan £50bn was not a 'bail-out' of the banks and was not designed to stimulate mortgage lending. |
| Mr King said it would be a mistake to go back to where the mortgage market was a year ago, when loans were cheaper and easier to get. | Mr King said it would be a mistake to go back to where the mortgage market was a year ago, when loans were cheaper and easier to get. |
| However, despite not being the target for the loan scheme, Mr King said that if successful, homeowners should benefit from the scheme down the line. | However, despite not being the target for the loan scheme, Mr King said that if successful, homeowners should benefit from the scheme down the line. |
| "There is the need for an adjustment in the mortgage market," he said. | "There is the need for an adjustment in the mortgage market," he said. |
| "But I do think the improved confidence in the banking sector, which I think this scheme will eventually restore, will feed through to borrowers and we'll see the mortgage market operating on a more normal basis." | "But I do think the improved confidence in the banking sector, which I think this scheme will eventually restore, will feed through to borrowers and we'll see the mortgage market operating on a more normal basis." |
| Defending himself against an accusation from George Mudie MP that he lacked sympathy for struggling homeowners, the governor said, | Defending himself against an accusation from George Mudie MP that he lacked sympathy for struggling homeowners, the governor said, |
| "I am not in favour of attaching political objectives to central bank operations," Mr King said. | "I am not in favour of attaching political objectives to central bank operations," Mr King said. |
| Mortgage costs | Mortgage costs |
| Mr King had to field questions about whether the main measure of inflation, CPI, which the Monetary Policy Committee uses as a target for setting interest rates, accurately reflected the rising housing costs faced by homeowners. | Mr King had to field questions about whether the main measure of inflation, CPI, which the Monetary Policy Committee uses as a target for setting interest rates, accurately reflected the rising housing costs faced by homeowners. |
| Mr King said he said a change in how CPI was measured would be "desirable". | Mr King said he said a change in how CPI was measured would be "desirable". |
| "I would like to see CPI include house prices in some form," he told the committee of MPs. | "I would like to see CPI include house prices in some form," he told the committee of MPs. |
| The measure does not currently include mortgage costs, but does include rental prices. | The measure does not currently include mortgage costs, but does include rental prices. |