A shock report has revealed the Bank Of England were aware of problems with liquidity of banks just before the financial crash in 2007, but did nothing.
Astonishingly, the bank’s governing body – known as the Court – discussed the issue in a top secret meeting just a month before the storm broke and identified liquidity as ‘a central concern’.
The bank has just published the minutes of the Court’s meetings between 2007 and 2009 which revealed banks thought to be in trouble were given special code names. Royal Bank Of Scotland, still 82% owned by the taxpayer, was called Phoenix and Lloyds TSB was Lark.
The reports reveal that in July 2007 the Court discussed staff pensions, open days and new members of the Monetary Policy Committee. A new model being worked on to detect risks to the financial system was also mentioned, but there was little suggestion of any impending trouble.
Six weeks later, the minutes of the meeting show the Court was told to have confidence in the triple oversight of the Bank Of England, the Treasury and the Financial Services Authority (FSA). This was despite turmoil in the financial markets after the French bank BNP Paribas had admitted its exposure to sub prime mortgages in the US – generally taken to be the start of the financial crisis.
The entry said: “The Executive believe that the events of the last month have proven the strength and sense of the tripartite framework.”
The very next day the Court was called into emergency session when the BBC announced that Northern Rock had applied to the Bank of England for a rescue loan. Once the news became public, thousands of customers were queuing outside Northern Rock branches to get their money out.
The minutes of this meeting showed a complete change in attitude as the members realised the dangers posed by the possible failure of Northern Rock. The minutes record: “Both the Bank and the FSA were in total agreement that if Northern Rock was allowed to fail it would create serious economic damage.”
They were concerned that if one bank was allowed to fail it would set off a domino effect among other banks which were also in trouble. An offer of £3 billion emergency funding for Alliance and Leicester was made in secret.
Commenting on the publication of the minutes, MP Andrew Tyrie, chairman of the Treasury Select Committee, criticised some of the Court’s non-executive directors. He said: “The minutes show that during the crisis the Bank Of England did not have a board worthy of the name. This mattered – and it still matters.
“Even when questions were asked by individual non-executive directors, the executive usually presented a united front to the Court, apparently rendering it of little or no use as a forum for creative discussion and constructive challenge,” he added.
Mr Tyrie was especially critical of the role of the non-executive directors. He said: “They appear to have done little thinking of their own about financial stability and to have added little or no substantive value to the bank’s work on it.”
Claiming they acted merely as ‘cheerleaders’ for the views of the executive, he said they should have done more to challenge governor Mervyn King’s view that the bank’s main purpose was monetary policy rather than financial stability.
The committee’s chairman at the time of the crisis, Lord McFall, said: “They all missed the wider picture. They missed the interconnectedness of the whole financial system …… when Lehman went down it was a real catastrophe.”
The composition of the Court has since been changed and there are no non-executive directors. Rules on potential conflict of interest have also been tightened.