Diary of a shambles: Bank of England’s struggle with financial crisis
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Version 0 of 1. Lord King called it “fun” being governor of the Bank of England during the financial crisis. There’s no such sense of enjoyment, or even job satisfaction, in the minutes of the time. As Badger (Bradford & Bingley), Fox (HBOS) and Phoenix (Royal Bank of Scotland) crashed through the undergrowth, officials struggled to keep up. Feel the stunned realisation of what is happening in passages such as this, from 1 October 2008: “It was noted that the Bank’s exposure to Fox and Lark [Lloyds TSB] was likely to be around £180bn, without any further deterioration in funding conditions. This was very large.” In the end, of course, the Bank coped. After the collapse of Lehman Brothers, Threadneedle Street concentrated on injecting capital into the system instead of treating each bank’s crisis as an individual affair. That much we knew already. The value of these minutes is twofold. First, they illustrate the depth of the failure of the tripartite system of regulation, in which responsibilities were divided between the Bank, the Financial Services Authority and the Treasury. Second, they show the court of the Bank as a meek body, unwilling or incapable of challenging Bank officials. On the tripartite front, it is astonishing that executives thought during the Northern Rock crisis of 2007 that the system was working well. Bank officials soon reversed their thinking entirely, though the court doesn’t seem to have bothered to ask why. Nor do the non-executive directors appear to have challenged King’s concern with “moral hazard”. As Andrew Tyrie, Treasury committee chairman, notes, even after the crisis broke, the non-executives also seem to have accepted with little debate the notion that the Bank should concentrate on monetary policy and leave financial stability as an “ancillary” activity. Tyrie’s verdict – the Bank did not have a board “worthy of the name” – seems spot on. Arrangements have transformed since those days. The tripartite system of regulation was abolished by the incoming coalition government and the Bank is now in charge of supervising banks; the court, belatedly, is being overhauled. Such sensible reforms have yet to be tested by events, of course, but they can’t fail to be a vast improvement on the shambolic system of 2007-09. Lloyds row alert Here’s a safe pre-election prediction: there will be an almighty row when Lloyds Banking Group, about nine weeks before polling day, announces that chief executive António Horta-Osório will pick up £10m for the year and another seven managers will share £20m in share-based rewards. The payday, as Jill Treanor reported yesterday, is largely a function of a three-year incentive scheme drawn up when Lloyds’ shares languished at 34.7p. The price has more than doubled since then, inflating the valuing of Horta-Osório’s allocation to about £7m. Throw in a £1m salary, a £900,000 “allowance” and a regular annual bonus and the boss stands an excellent chance of collecting £10m for 2014. As Lloyds would be quick to point out, the £7m is a function of three years’ toil, not just one. It would also argue, correctly, that taxpayers have benefited from the improvement in Lloyds’ share price. Even so, £10m is a mighty sum for a partially state-owned bank that has been shedding jobs by the thousand and hasn’t paid a dividend since 2008. Horta-Osório, remember, has been a vocal critic of Ed Miliband’s plans to break up the big lenders. If the opposition sees gain from a round of banker-bashing, there will be few qualms about giving Horta-Osório a thump. Lord Blackwell, Lloyds chairman, should brace for combat. If he wants to sanction these payments, he would be well advised to shore up support from the Treasury before the heat of an election campaign. |