Tony Blair might have acted to avert financial catastrophe if only the regulators had warned of the extent of the problems. In the absence of such warnings, the boom meant tough statutory regulation was virtually impossible.

That is his claim, at least, in this FT interview.

The Financial Services Authority has itself admitted its failings, in particular over its failure to stop the implosion of Northern Rock. Here is the FSA’s self-flagellating report from March on how and why it performed so badly.

But other authorities were aware of certain problems building up as long ago as late 2004, even if their warnings were wrapped in the usual fog of ifs and buts. Here is a link to a financial stability review by the Bank of England in December 04.

It said… 

* UK banks have built up a number of risky investment positions that could trigger a financial crisis if a shock caused a sudden rush to sell up

* The benign economic background had allowed institutions to become complacent about the nature and scale of the risks they had taken on

* Some market participants expressed misgivings at the scale of investor demand for risky and potentially illiquid assets. Unexpected economic developments could trigger the attempted simultaneous unwinding of common positions, possibly leading to strains on market liquidity

* Lenders’ credit-scoring techniques had not yet been tested in times of stress

* There might be a (property) bubble…In some cases banks may have credit exposures to both real estate companies and corporate borrowers that are tenants

Sir Andrew Large, the Bank’s deputy governor with responsibility for financial stability, said: “In the present benign environment, there is a possibility that lenders, borrowers and investors may be inclined to underestimate long-run vulnerabilities and take on too much risk.”

To be fair to Tony Blair the report was wildly wrong on two suggestions:

a] It said the City of London was sufficiently robust in terms of capital and profits to withstand a shock.

b] It played down the risk that a crash in the property market would put strains on the banking system. 

January 9, 2009 12:28pm in Credit Crunch, UK economy | Comment