13/09/2007 11:31
A clear divide between the world’s leading central banks over how best to respond to the credit squeeze emerged on Wednesday after Mervyn King, Bank of England governor, warned that efforts by his counterparts to shore up the financial system could sow “the seeds of a future financial crisis”.
In a trenchant defence of the Bank’s refusal to address the abnormally high interest rates for longer-term lending between banks, Mr King questioned the effectiveness of the kind of measures taken by the European Central Bank and said their approach could encourage “excessive risk-taking”.
His comments were later reinforced by David Dodge, the Canadian central bank governor.
The ECB pumped an extra €75bn (£51bn) into the financial system in an effort to reduce the interest rate gap between overnight funding and lending over longer maturities.
But in a written submission to the Commons Treasury select committee, Mr King warned of the hazards of providing central bank insurance to those institutions that have engaged in reckless lending.
“The provision of large liquidity facilities penalises those financial institutions that sat out the dance, encourages herd behaviour and increases the intensity of future crises,” he added. Central banks should not “sensibly entertain” such cash injections just to maintain the status quo, he added.
His remarks came as Alistair Darling, the chancellor, attacked banks for lending too freely and allowing consumer debt to soar. In an interview in Thursday’s Daily Telegraph, he calls for a return to “good old-fashioned banking”.
In the money markets, the cost of borrowing for three months in the London interbank market fell slightly on Wednesday in all areas.
The dollar also fell to a lifetime low against the euro of $1.3914 on expectations that the Federal Reserve will cut interest rates.
The disagreement among central bankers centred on how far they should go to try to normalise conditions in money markets.
The ECB said last Thursday it would pump three-month money into the system to “support a normalisation of the functioning of the euro money market”. Both Mr King and Mr Dodge said commercial banks were strong enough to absorb the assets of troubled investment vehicles.
Separately, policymakers are set to step up calls for greater transparency in the structured finance world when EU finance ministers meet in Portugal on Friday. Discussions are also continuing over other responses to the crisis, such as a review of bank capital standards or efforts to pool distressed assets.
In a trenchant defence of the Bank’s refusal to address the abnormally high interest rates for longer-term lending between banks, Mr King questioned the effectiveness of the kind of measures taken by the European Central Bank and said their approach could encourage “excessive risk-taking”.
His comments were later reinforced by David Dodge, the Canadian central bank governor.
The ECB pumped an extra €75bn (£51bn) into the financial system in an effort to reduce the interest rate gap between overnight funding and lending over longer maturities.
But in a written submission to the Commons Treasury select committee, Mr King warned of the hazards of providing central bank insurance to those institutions that have engaged in reckless lending.
“The provision of large liquidity facilities penalises those financial institutions that sat out the dance, encourages herd behaviour and increases the intensity of future crises,” he added. Central banks should not “sensibly entertain” such cash injections just to maintain the status quo, he added.
His remarks came as Alistair Darling, the chancellor, attacked banks for lending too freely and allowing consumer debt to soar. In an interview in Thursday’s Daily Telegraph, he calls for a return to “good old-fashioned banking”.
In the money markets, the cost of borrowing for three months in the London interbank market fell slightly on Wednesday in all areas.
The dollar also fell to a lifetime low against the euro of $1.3914 on expectations that the Federal Reserve will cut interest rates.
The disagreement among central bankers centred on how far they should go to try to normalise conditions in money markets.
The ECB said last Thursday it would pump three-month money into the system to “support a normalisation of the functioning of the euro money market”. Both Mr King and Mr Dodge said commercial banks were strong enough to absorb the assets of troubled investment vehicles.
Separately, policymakers are set to step up calls for greater transparency in the structured finance world when EU finance ministers meet in Portugal on Friday. Discussions are also continuing over other responses to the crisis, such as a review of bank capital standards or efforts to pool distressed assets.
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