Bank of England's King: Banks May Need More Cash
Bank of England governor Mervyn King warned Thursday that Britain's troubled banks may need to tap the government for more money to shore up their battered finances and downplayed fears that measures to boost the money supply will stoke inflationary problems in the future.
Addressing lawmakers on the influential Treasury Select Committee, King said it will take many months for the government and regulators to work out the true underlying financial position of the banks.
"How much capital banks will need in the end is impossible to tell because in large part it will reflect developments in the world and our own economy that are impossible to predict with any precision," King said.
The governor's comments came after Royal Bank of Scotland Group said it will dump around 325 billion pounds worth of toxic assets into a government insurance scheme -- a move that could see the state increasing its stake in the bank to 95 percent.
Barclays opted out of the government recapitalization and chose instead to take money from Arab investors.
On top of the insurance scheme, the government has already injected 37 billion pounds directly into Royal Bank of Scotland and Lloyds Banking Group to stave off their possible collapse.
In return, the government has taken a near 60 percent stake in RBS, soon to be raised to 70 percent, and a 43 percent shareholding in Lloyds.
King also sought to deflect any criticism for the banking crisis from the Bank of England and laid the bulk of the blame on ill-equipped regulators around the world.
One of the lessons of the crisis, he said, was "not to expect too much from regulators", whether they use "soft-touch" methods as in Britain or more aggressive tactics as pursued in the U.S.
He continuously stressed that the central bank has absolutely no powers to ask for financial information from individual banks and that its only power rested with speeches and reports it issues or in arguments made when speaking to the Financial Services Authority -- the industry regulator -- and the government.
"We don't have any powers at all other than dealing with banks that have already failed," he said.
"I hope you will remember that when you try to hold us accountable for things where we simply have absolutely no powers to take any actions," he told lawmakers in their latest inquiry into the causes of the banking crisis.
On Wednesday, the FSA's new chairman Adair Turner conceded that his organization's regulation of banks had been flawed, that the "light-touch" approach had been insufficient.
King agreed with Turner's assertion that in the future the banks would be required to hold more capital, especially if they grow too quickly.
King also slammed the credit ratings agencies for their failure to spot the crisis gripping the world's banks.
"There is a good deal to be said for downplaying the role of credit ratings in its entirety," said King.
The rate-setter also sought to soothe concerns that the raft of measures being enacted by government as well as the central bank will lead to an inflationary surge in the future.
"The problem at present is not that the amount of money in the economy is growing too rapidly...it's that the amount of money in the economy is growing too slowly," he said.
Because of this, the Bank of England has asked Britain's finance minister Alistair Darling for the power to start buying assets from the banks to increase the amount of money in the economy.
"I would expect that to happen over the next few months," King said.
"And I can give my personal assurance and that of every member of the Monetary Policy Committee that we are totally focused on that and we are not going to allow a great inflationary surge," he said.
King also stressed the international nature of the downturn and said it was crucial that all countries played their part in reflating their economies.
The committee's lawmakers have already quizzed bank executives, hedge funds and even journalists during their enquiry.