Report on dealing with the failure of UK banks

01 May 2009

The Treasury Committee today releases its second report on the Banking Crisis, entitled Banking Crisis: dealing with the failure of the UK banks. The report examines the failure of the UK banks and the steps the Government has taken since.

The Committee concludes that the origins of the banking crisis were many and varied, including low real interest rates, a search for yield, apparent excess liquidity and a misplaced faith in financial innovation. These ingredients combined to create an environment rich in overconfidence, over-optimism and the stifling of contrary opinions. Notwithstanding this febrile environment, some of the banks have been the principal authors of their own demise.

The culture within parts of British banking has increasingly been one of risk taking, leading to the meltdown that we have witnessed. Bankers have made an astonishing mess of the financial system. However, this was a failure not only within individual banks but also of the supervisory system designed to protect the public from systemic risk.

John McFall, Chairman of the Committee said:

"We have experienced a comprehensive failure of the banking system at all levels. The banks have failed to govern themselves effectively: senior managers failed to understand the investments being made in their name; risk management and due diligence were seemingly ignored; and the non-executive directors, often eminent and hugely experienced individuals, failed in the proper scrutiny of the banks' activities.

Governments, politicians, regulators and central bankers in the UK and across the world also share a responsibility for sustaining the illusion that banking growth and profitability would continue for the foreseeable future. Today’s report looks both at the origins of the crisis and the steps the Government has taken to resolve it so far. Whilst we would hope that the nature of banking, and bankers, would change in response to what has happened, the responsibility also falls on the regulator to create a more durable framework for finance in the future. Rewards for failure must not be repeated. We will address this and other aspects of regulation in forthcoming reports."

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