Monday December 22, 11:43 AM
Bank of England 'did not expect' such a severe crash
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LONDON (AFP) - The Bank (NASDAQ: TBHS - news) of England under-estimated how serious the credit crunch would be, its deputy governor admitted in comments due to be broadcast on Monday.
Sir John Gieve said that although the bank knew "crazy borrowing" was taking place, it did not think the crisis was going to be so deep as it turned out to be because it had not taken account of the impact of globalisation.
He also raised questions about whether the government would get its money back after propping up banks including Northern Rock (LSE: GB0001452795.L - news) , which it announced in February would be nationalised.
"We did see something coming, we did spot the global imbalances, we worried about them, we did spot some crazy borrowing going on... and we said actually for a couple of years before the crash that a correction was coming," Gieve told BBC television.
But he added: "We didn't think it was going to be anything like as severe as it turned out to be."
Gieve, who is to step down next year, was sharply criticised by lawmakers on parliament's Treasury Select Committee for his handling of the Northern Rock affair.
Questioned on why the central bank failed to spot the extent of the threat, Gieve said: "Why didn't we see it was so serious?
"I think that's because perhaps we hadn't kept pace with the extent of globalisation, so the upswing here didn't involve the big increases in earnings and consumption and activities which we saw in previous booms".
He wanted to see a new policy instrument "which makes it expensive for banks to expand rapidly in the upswing" and cushions them more in the downswing, describing interest rates as a "blunt instrument" because they affect the whole economy.
Speaking of the chances the government will get its money back after propping up Britain's banking sector, he said: "There are some books -- Northern Rock, Bradford & Bingley -- which the taxpayer's now holding which clearly have a level of defaults in them, (I'm) not quite sure how that will balance out against the residual of the capital".
But he added that "more mainstream banks" had a commercial future and would grow again.
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