'Culpability Brown' to blame for banking crisis

SNP Treasury Spokesperson, Stewart Hosie MP said the was "no escape" for Gordon Brown as yet more evidence piled up to suggest he is responsible for the current crisis in the banking sector.

Following admissions by Financial Services Authority (FSA) Chairman, Lord Turner, that "the whole system was risky" and "they didn’t focus enough", Stewart Hosie has pointed to the Bank of England’s Financial Stability Report 2007 which shows the UK Government and the Bank also wilfully ignored warnings in the run up to the crisis which led to the current recession.

Commenting, Mr Hosie said:

"It wasn’t only the FSA who disregarded the fatal flaws in the banking system, the Bank of England and the London Treasury wilfully ignored their own assessments, too.

"These organisations constitute the tripartite system set up by Gordon Brown. So once again, as the failure of this regime is coming to light, there is no escape for the Prime Minister.

"The Bank of England’s 2007 Financial Stability Report, the last one before the run on Northern Rock and the full blown banking crisis, acknowledged both weaknesses and vulnerabilities including weakened credit risk assessment, impaired risk monitoring, and impaired market liquidity. But it glossed over the dangers when it said, ‘the UK financial system remains highly resilient’ and that ‘financial innovation and the growing use of credit risk transfer markets have increased the risk-bearing capacity of the system’.

"So while the Bank of England stated that its focus was on ‘assessing threats to the financial system as a whole’- something it patently failed to do - Lord Turner has conceded that the FSA failed to spot the ‘large systemic risk’ in the banking system."

Mr Hosie’s comments came amid reports revealing the UK Government’s action plan to bail out the economy is in chaos with the CBI predicting the UK Government will have to borrow more than an additional £100bn to help the UK economy through the recession.

Mr Hosie added:

"This whole fiasco is typified by a failure to respond responsibly to risk. The blame lies squarely at the door of 10 Downing Street – and with Culpability Brown."

Please see below for excerpts from the Bank of England’s 2007 Financial Stability Report:

Page 5:

"The UK financial system remains highly resilient. But strong and stable macroeconomic and financial conditions have encouraged financial institutions to expand further their business activities and to extend their risk-taking, including through leveraged corporate lending, and the compensation for bearing credit risk is at very low levels. That has increased the vulnerability of the system as a whole to an abrupt change in conditions. Financial innovation and the growing use of credit risk transfer markets have increased the risk-bearing capacity of the system — but also bring some risks."

"The operating environment for UK banks and global financial institutions has remained stable over much of the period since the July 2006 Report. Conditions are likely to remain favourable."

"In contrast to individual firms’ risk management, the Bank’s focus is on assessing threats to the financial system as a whole, given the major costs to the economy of financial system failure."

"benign economic conditions have kept losses on major UK banks’ corporate and secured household debt exposures at very low levels..."

"The trading of credit risk in financial markets enables risk to be better diversified across the system as a whole."

POTENTIAL WEAKNESSES INCLUDE:

l Weakened credit risk assessment. Those arranging loans may be less inclined to assess credit quality at origination if they bear little of the ultimate risk. While market mechanisms exist to ensure that originators distributing risk remain exposed to some of the potential credit loss, the high levels of arrears in recent vintages of US sub-prime mortgage lending (Chart 4) raise questions about the effectiveness of those mechanisms.

l Impaired risk monitoring. While credit risk transfer has led to greater dispersion of risk, new holders of risk may have less access to information on borrowers. In such cases, monitoring may be partly delegated to others, including rating agencies and managers of structured credit vehicles, such as collateralised debt obligations (CDOs). Investors could become overly reliant on their risk assessments. Some investors may not appreciate fully that ratings provide only a summary opinion on the riskiness of a product. And those with mandates restricting their investment to certain ratings bands may be attracted by higher-yielding products within those bands, without fully appreciating the associated risks.

l Impaired market liquidity. Financial institutions can become more dependent on sustained market liquidity both to allow them to distribute the risks they originate or securitise and to allow them to adjust their portfolio and hedges in the face of movements in market prices. If it becomes impossible or expensive to find counterparties, financial institutions could be left holding unplanned credit risk exposures in their ‘warehouses’ awaiting distribution or find it difficult to close out positions, as was apparent in synthetic US sub-prime mortgage markets in February