BOE Documents Open New Window to U.K. Response to Financial Crisis

 
   By Jason Douglas 
 

        LONDON--A trove of documents from 2007 to 2009 released by the Bank of England Wednesday opened a new window into the U.K.'s response to the financial crisis, detailing the central bank's fears for the British economy, as well as officials' penchant for cutesy code-names for stricken banks.
        Previously unpublished minutes of the BOE's court, its board of directors, chart how a funding problem at mortgage lender Northern Rock PLC in late 2007 morphed into a crisis that engulfed some of Britain's biggest banks and tipped the U.K. into a severe recession less than a year later. The global economy entered a full-scale downturn in 2009.
        The minutes record how senior officials, led by Gov. Mervyn King, grew increasingly disillusioned with the U.K.'s regulatory setup as the crisis intensified. They would push for reforms that in 2013 led to the 321-year-old central bank being handed sweeping new powers to police the banking system and safeguard financial stability.
        The minutes also record, according to a panel of lawmakers who pressed the BOE to disclose the minutes, the toothlessness of the BOE's court itself. "The minutes show that during the crisis the Bank of England did not have a board worthy of the name," said Andrew Tyrie, chairman of parliament's Treasury Committee, which has long argued senior BOE officials need to be subject to stricter oversight from an effective and independent board of directors. Reforms to strengthen the court announced in December are a step in the right direction, Mr. Tyrie said.
        The minutes show that at an emergency meeting in September 2007, the court was told that Northern Rock had requested emergency cash from the BOE after other sources of funding dried up. News of the lifeline triggered a run on the bank, the first in Britain in more than a century.
        According to the minutes, officials were satisfied the lender appeared to be solvent despite its funding crunch and that the U.K.'s regulatory framework, which split responsibility for the financial sector between the BOE, the Treasury and the now-defunct Financial Services Authority, was working smoothly. "The episode had provided the evidence of the virtue of the new framework," according to the minutes.
        A series of further lending operations followed as bank after bank stumbled. To BOE officials eager to keep news of the financial aid quiet, mortgage lender Bradford & Bingley PLC was code-named "Badger," while Lloyds TSB and HBOS, forerunners of Lloyds Banking Group PLC, were "Lark" and "Fox." Royal Bank of Scotland Group PLC was "Phoenix."
        In September 2008, Lehman Brothers Holdings Inc. collapsed, illustrating how the crisis "had become much more serious," the minutes said. The BOE's benchmark interest rate in September 2008 was 5%; by March the following year it had been slashed to 0.5% and the central bank had begun buying assets in a three-year stimulus push known as quantitative easing.
        "Only a complete systemwide plan could resolve the ongoing problems in the banking system," BOE officials concluded in September 2008, abandoning their earlier belief that fixing banks one by one would work.
        At a later meeting they concluded that allowing Lehman Brothers to fail triggered a "progressive collapse of confidence in banks that earlier would have been almost unimaginable." The U.K. took a leading role in international negotiations in 2008 to turn billions of dollars of taxpayer cash into fresh capital for the world's biggest banks.
        For BOE officials, the crisis revealed that the U.K.'s three-pronged system of financial regulation meant they didn't have access to all the tools and data they needed to act as lender of last resort to the banking system in an emergency, a situation officials deemed "unacceptable," according to minutes from April 2009. Reforms enacted by treasury chief George Osborne handed overall responsibility for financial supervision to the BOE in 2013.
        Write to Jason Douglas at jason.douglas@wsj.com
        (END) Dow Jones Newswires

        January 06, 2015 19:05 ET (00:05 GMT)

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