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Why our banking system is now far safer a decade on from the collapse of Lehman Brothers - Bank of England executive Alex Brazier

Wales Online logo Wales Online 12/09/2018 Sion Barry

a man wearing a suit and tie: Executive director of financial stability for the Bank of England Alex Brazier © Provided by Trinity Mirror Shared Services Limited Executive director of financial stability for the Bank of England Alex Brazier The UK will remain a leading global financial powerhouse regardless of the outcome of Brexit negotiations, with its biggest threat coming from outside the European Union, believes Bank of England executive Alex Brazier.

Speaking on a visit to south Wales, the central bank’s executive director for financial stability strategy and risk said it had taken action to ensure that, in the eventuality of a hard Brexit, UK consumers and businesses would not suffer unnecessary disruption in accessing financial services, while adding that the bank had a role to play in promoting the availability of other sources of growth finance to businesses that were increasingly available beyond traditional bank debt.

On a worse-case scenario of the UK crashing out of the EU without a deal, he said it was difficult to say what exact impact it would have on the UK’s dominant financial services sector.

LONDON, ENGLAND - SEPTEMBER 13:  Parliament's Big Ben clock tower undergoes a major renovation as viewed from the London Eye on September 13, 2017, in London, England. Great Britain's move toward 'Brexit,' or the departure from the European Union, has not deterred the late summer crowds visiting city museums, hotels, and other important tourist attractions. (Photo by George Rose/Getty Images) © Catalyst Images LONDON, ENGLAND - SEPTEMBER 13: Parliament's Big Ben clock tower undergoes a major renovation as viewed from the London Eye on September 13, 2017, in London, England. Great Britain's move toward 'Brexit,' or the departure from the European Union, has not deterred the late summer crowds visiting city museums, hotels, and other important tourist attractions. (Photo by George Rose/Getty Images)

However, he added: “The big point is regardless of what happens with Brexit is that Britain will remain a global financial centre. London and the rest of the UK, and Cardiff as well, isn’t just a European financial centre, it is a global financial centre. So there may be some jobs moving as firms execute their contingency plans, but I don’t expect the big picture to change.

“There are examples around Brexit where it is not a question of whether the business moves from London to some other European centre, but whether the business goes to, say, New York than the EU... So it is not a zero-sum game.”

a view of a large body of water with a city in the background © Credits: Handout

He said it was not the Bank’s role to second-guess how the current negotiations on Brexit will play out.

Mr Brazier said: “From our perspective, it has not been to try and predict the outcome of the political negotiations, but to think what could happen and is the financial system ready for it?

“So one is making sure the system is safe whatever happens to the economy, which is the stress-testing angle [of banks]. The other has been what if barriers come up to providing financial services across the Channel?

Related: Rebuilding lives, 10 years after Lehman Bros' fall [Reuters]

“So we have been building a so-called check list of what needs to be done, even in a hard Brexit, to make sure that people don’t have to worry about access to those financial services. And working with the [UK] Government, measures are now in place, so whatever happens that service can continue.”

Following the financial crisis and ensuing recession of a decade ago, which saw the collapse of Lehman Brothers and the UK Government having to bail out the Royal Bank of Scotland, among others, he said the UK was “undoubtedly in much better shape,” to weather the impact of any future shocks to the financial system.

a man wearing a suit and tie © Provided by Trinity Mirror Shared Services Limited

He said: “We have spent a lot of time over the last 10 years reflecting on what caused that financial crisis and what to do about it to reform and strengthen the banking system since.

“What caused it is very simple, in that British banks had lent too much of other people’s money to people who were not going to pay it back. Some of them were in the US subprime mortgage market and some were in the UK as well. Frankly, they didn’t have enough of their own money on the line to absorb the losses.

The big thing that has happened over the past 10 years is that by stress-testing the banks to very bad economic circumstances, they have had to strengthen themselves and put more of their own money on the line, so if anything very bad did happen to the economy – and who knows what would cause it? – they would have the strength to deal with it.

" And more than just survive, they would have the strength to keep lending. So rather than just adding to the problem in such circumstances, they could actually be a support to the economy.”

Mark Carney, the Governor of the Bank of England, speaks to the Houses of Parliament's Treasury Committee, in London, Britain, September 4, 2018. Parliament TV Handout via REUTERS  FOR EDITORIAL USE ONLY. NOT FOR SALE FOR MARKETING OR ADVERTISING CAMPAIGNS  THIS IMAGE HAS BEEN SUPPLIED BY A THIRD PARTY © Catalyst Images Mark Carney, the Governor of the Bank of England, speaks to the Houses of Parliament's Treasury Committee, in London, Britain, September 4, 2018. Parliament TV Handout via REUTERS FOR EDITORIAL USE ONLY. NOT FOR SALE FOR MARKETING OR ADVERTISING CAMPAIGNS THIS IMAGE HAS BEEN SUPPLIED BY A THIRD PARTY

Funding for SMEs

Despite an increase in new bank authorisations with the rise of challenger banks, in terms of market share the big banks still dominate. However, Mr Brazier said it was important, particularly for start-ups and SMEs, to highlight the availably other sources of growth finance.

He said: “Britain has been fairly bank-dominated for a long time and by that I mean finance has largely been provided by a relatively small number of banks. I think it is very important that we make finance as competitive as possible.

It is good for consumers and actually the more diverse finance is, the safer it is as well. Part of the problem 10 years ago was that so much finance was provided to the economy by a very small number of banks who then frankly got into difficulty and we had a credit crunch which brought the economy down with it.

“A more diverse financial system is a safer financial system. We have been thinking hard about not only how to increase competition within banks, but also how to open up finance more broadly."

A statue is silhouetted against the Bank of England in the City of London, Britain, December 12, 2017. REUTERS/Clodagh Kilcoyne © Catalyst Images A statue is silhouetted against the Bank of England in the City of London, Britain, December 12, 2017. REUTERS/Clodagh Kilcoyne

He said there were a number of key elements to achieving this.

Mr Brazier said: “The first is making sure that banks can fail and if they do, it is safely. Before and during the financial crisis, a number of banks were so called ‘too big to fail’. And they had to be bailed out by the public purse. That is not good for fairness and the economy.”

However, he added: “There is now a legal regime in place which means if a bank gets into trouble we can effectively not put it into bankruptcy, but can take control of it, change the management, shareholders lose their money, the bank reopens and the services it provides continue... in the jargon, it’s called resolution.

“And partly because banks can fail more safely, we have been able to authorise more banks in the past few years then we have ever authorised before.” He said this was not just to new challenger banks."

Pedestrians shelter under umbrellas in front of the Royal Exchange and the Bank of England, in London, Britain August 16, 2018.  REUTERS/ Hannah McKay © Catalyst Images Pedestrians shelter under umbrellas in front of the Royal Exchange and the Bank of England, in London, Britain August 16, 2018. REUTERS/ Hannah McKay

On access to finance for small businesses, he said in the UK, as in many other countries, there were issues. He added: “A bank loan for a fixed amount of time isn’t necessarily the right sort of finance for someone [business] growing very quickly. First of all they might need seed capital, then angel investors and then some venture capital. Then eventually they might need a bank loan.

“There is an issue around knowledge of what sort of finance is available, but finance of a broad sort is available. One of the things I will take back with me [after speaking to firms in Cardiff] is maybe there is more to do to open up knowledge of what is available to small businesses.”

Related: The scariest moments of the financial crisis [Business Insider]

He said this was partly an educational and government role, but added: “And as the regulator, we should do whatever we can to nudge things in the right direction.”

He said bond financing, particularly for corporates, has grown significantly. He added: “You can also see it [more diverse funding] with the regeneration of the city centre of Cardiff [funded by L&G] with non-banks providing a lot of money.

“So it is not a question of simply saying the banks are doing less, so therefore there is less, but what we have actually seen since the crisis is a huge re-balancing of finance away from banks towards other sources.”

Consumer debt

a close up of text on a white background © Credits: Gareth Fuller/PA Wire

With consumer credit growing at double-digit rates around 18 months ago, the bank intervened to slow the rate by requiring lenders to put more of their own capital at risk.

He said: “The level of consumer debt relative to incomes is not unusually high in Britain right now. It is basically where it has been on average for the last 15 years.

“But that growth rate [18 months ago] signalled to us that maybe lenders were loosening their underwriting standards in trying to grow volume.”

In real terms, banks had to put around an additional £10bn of their capital into consumer lending.

Mr Brazier said: “That is not us stopping credit card or personal lending, but it has to be done safely and sustainably. In previous cycles consumer credit has been a big driver of the losses that banks made. In contrast to mortgage debt, people tend to default when they get into trouble on their credit cards and personal loans. Then lenders get into trouble and rein in and all of a sudden you are into this dynamic of the financial sector dragging the economy back.

“So the action we took 18 months ago now was to make sure the lenders put more of their own capital at risk when they did that sort of lending. Since then we have seen the growth rate of consumer credit slow.

Reaching out

He said as an institution, the Bank of England, which sets interest rates, was keen to talk to a much wider section of society than previously.

Mr Brazier said: “Not all parts of the economy feel that sense of dynamism and optimism. So we are trying to reach out and engage more broadly

" I spent some time with the members of the Wales Council for Voluntary Action. Day to day, they meet people who are less fortunate and maybe are in difficulty. We are accountable to everyone and it is important that we talk to everyone and not just listen to their concerns, but also explain what we are doing and how our actions affect them.”

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