-Says No Silver Bullet To Quickly Fix Economic Situation

LONDON (MNI) – Bank of England Financial Policy Committee Member
Michael Cohrs has warned that the authorities should be wary of pushing
the banks too hard to boost lending at times like these.

In a speech at the University of the West of England, Cohrs says
that it is rational and prudent for households and firms to deleverage
at present.

“The current low levels of lending are partially because
creditworthy companies and households have decided to either get their
house in order or deleverage to protect themselves from the storms we
currently are feeling or they see coming in the next few years”.

While the importance of lending to boost economic growth is
“clear”, he says there is a lurking danger if schemes to incentivise
bank lending are pushed too hard.

“If we push too hard on the lending theme we will simply raise
default levels, as more of the borrowers will not be creditworthy. There
is no silver bullet to quickly fix the current economic situation”.

Cohrs urges international regulators to adopt a greater sense of
urgency in coming up with a solution to the ‘too big to fail’ problem.

While the bank reform proposals, from John Vickers in the UK and
Erkki Liikanen in the euro area, are an important step forward, banks
need to face a real fear of failure if their behaviour is genuinely to
improve.

“Perhaps the now discredited concept of allowing financial
companies to blow themselves up, and then try and better deal with the
fall-out, may be whether we like it or not, the reality of where we end
up”.

“One of the most important global issues is trying to resolve too
big/important to fail. As long as financial institutions, and those who
fund and own them, believe that the state will rescue them when they are
in distress we will continue to have the problems that manifested
themselves so brutally in 2007/2008. We will not be able to instill the
culture we want in financial institutions if this issue is not tackled”.

Cohrs says it is not that regulators are not focusing on too big
too fail, just that the issue requires a greater sense of urgency. The
official suggests that the biggest and most globally complex banks
should face a penalty or tax going beyond current Basel proposals, which
would be paid into an insurance fund which would smooth future
resolutions of such financial institutions.

“…the regulatory bodies should consider penalties or taxes on the
largest banks to create ‘insurance funds’ which will be used when
resolving one of the exceptionally large financial companies and to
create an economic incentive for the firms to down-size”.

–London newsroom 0044 20 7862 7492; email: dthomas@marketnews.com

[TOPICS: M$$BE$]