LONDON — Sir John Vickers, a former chief economist at the Bank of England, has warned that the UK banking system is vulnerable to shocks and that regulators are simply not prepared to handle a large crisis.
Vickers, who led a reform of banking rules in 2011, said policymakers had not gone far enough to make the financial system bullet-proof following the 2008 crisis, and were putting their faith in untested tools.
“I believe we’d be in huge trouble if a very large, very complicated banking institution got into trouble,” Vickers said on BBC Newsnight.
“There are tools, these so-called resolution tools, which didn’t exist 10 years ago, which I think shift the odds in a slightly more favourable place,” he said.
“But I certainly wouldn’t bet on those working perfectly. And I worry that the Bank of England and regulators internationally are placing huge reliance on these new, untried, untested tools working. That is a huge assumption to make,” he added.
Banks need to double the amount of capital they use to back their activities, said Vickers, whose post-crisis commission on banking in 2011 recommended splitting retail deposit taking from investment banking activities.
“I think we’ve done some good building but there’s an opportunity there to go a lot further, which should be taken. But the current policy stance is, no we don’t need to.”
He added: “I think the arguments, the evidence, the costs and the benefits, points to a need to go quite a bit further. I’d say we’re roughly, global level, halfway of where we ought to be.”
His remarks echo the concerns of some at the Bank of England, who have warned against returning to the days of risky credit expansions.
Sam Woods, CEO of the Bank of England’s Prudential Regulation Authority, said he had seen a potential return “to the punchbowl” in a speech in July, highlighting concerns that some banks are loosening their internal controls to create more credit and boost risk.