The UK banking sector has hit rock bottom with the Barclays crisis – and a “badly wrong” culture needs urgent change, says Bank of England committee member Michael Cohrs.
In an interview with the Birmingham Post, Mr Cohrs backed the Bank’s Governor Sir Mervyn King’s demand for a fundamental shift in banking culture in the wake of the rate-rigging scandal at Barclays.
“I do not want to talk about specific individuals or institutions but everybody should be aware that things went badly wrong in British banking and need to be put right.
“I think that the events of the last few days mean that if anybody didn’t realize there was a problem, they certainly do now.
“I think we have hit bottom. The events of the last few days have been extraordinary. This is a watershed moment.
“There are hundreds and thousands of hard working people who have been badly let down by some colleagues.”
The Bank of England’s Financial Policy Committee member, who was visiting Birmingham to talk to a range of bank contacts and others in business and industry, said events in the wake of the collapse of Lehman Brothers in 2008 bore comparison to the Great Depression – but he ruled out a similar 1930s-style slump.
He warned that UK economic conditions remained “poor”, with USA, Brazil, China and India all slowing down – and said the eurozone crisis was key to future stability, with “real fiscal union” in a “United States of Europe” a potential route to a new future.
He said a new banking business model was required, with too many banks moving away from traditional customer-related work over the last 20 years to concentrate on more profitable trading activities.
And he cited Jaguar Land Rover as a great example of a firm which had fought its way out of the recession – and said it was vital banks loosened the pursestrings to lend more to ambitious companies.
“Most bank lending is to other banks and we have been trying to work hard to get our banks to lend to the real economy and break the adverse feedback loop.
“It is very clear that what happened after Lehman Brothers went down was catastrophic for the manufacturing sector in particular – manufacturing activity reached its lowest levels in the last quarter of 2008 since the Great Depression.
“It is important that banks are making finance available to companies that want to expand. I think everybody recognises that there is not much lending going on (in the corporate sector).
“The Financial Policy Committee has been thinking about ways that we can break this adverse feedback loop and create more availability of funding to businesses in the UK.
“The banks of this country are sitting on a lot of liquidity. They have three times the liquidity today that they had back in 2008.”
He agreed with Mervyn King’s recent analysis that the UK economic downturn had not yet reached its halfway stage – and called for a new financial model to address the eurozone crisis.
“You either get fiscal union or you will get repeated issues over a long period of time.
“A lot of our exports go into the eurozone and the eurozone has some dark clouds hanging over it, to say the least.”
Mr Cohrs said over-leveraged institutions had contributed to the downturn. “Debt per se is neither good nor bad. Leverage is bad if you have too much of it.”
But he said his discussions in Birmingham with businesses had pinpointed areas of optimism.
“We have been talking about lending, lending conditions and general business conditions. The Financial Policy Committee has to worry about what is happening in the real economy.
“Part of the reason for doing this is to listen to people, both bankers and business people, about what they are finding in the markets.”
Mr Cohrs said the Birmingham visit had generated mixed messages from the business community, with some hunkering down rather than aiming to expand.
“Jaguar Land Rover is a perfect example of what we collectively need to create. We need to make sure that companies like that have the wherewithal to expand.
“Some people have talked about successful enterprises in the West Midlands. It is not all doom and gloom – it is good to get out and realize that the world goes on – there are good things happening.
“Entrepreneurs have to take some risk – the Financial Policy Committee is not trying to create a risk-free world. We are trying to get the balance right.”