Bank of England needs more effective warnings

Banks ‘ignored credit warnings’

Banks ‘ignored credit warnings’

Banks failed to take action to avert the developing credit crunch in part because they ignored warnings from regulators, MPs have said.

The system by which regulators – including the Bank of England and Financial Service Authority (FSA) – warn lenders of impending financial turmoil is “deficient” and must be strengthened to banks pay proper consideration, a Commons report has said.

The Commons treasury select committee heard from both FSA chiefs and Bank of England governor Mervyn King that regulators attempted to warn banks of the upcoming downturn through speeches and reports in the first half of last year.

“It is clear that some market participants did not heed these warnings and that the framework for issuing warnings of potential problems needs strengthening,” the report said.

But the committee said regulators were flawed in assuming they could issue warnings through speeches and expect anyone to take action.

Instead MPs said regulators should write to institutions highlighting their major concerns. The Bank and FSA should then ask for written confirmation the risks have been discussed at board level.

John McFall, the chairman of the committee, said: “Many market participants failed to heed warnings about a serious under-pricing of risk … The Bank and FSA can no longer hedge their bets, throwing potential risks out into the ether and then washing their hands of the consequences.”

In its second report into the causes and lessons of the credit crunch, the committee said the financial turbulence had exposed “serious flaws” in the financial industry.

Financial products have become increasingly complex, underwriting standards are looser and there is uncertainty about who bears risk, MPs noted.