FINANCIAL CRISIS REPEAT COULD FORCE BANK OF ENGLAND TO BAIL OUT MARKETS

A repeat of the 2008 financial crisis could require the Bank of England to rescue trillion-dollar financial markets because business lending has shifted away from traditional banks, the BoE governor Mark Carney has said.

Speaking at a gathering of central bankers in Paris on Friday, Carney said a structural shift away from bank lending meant markets for bonds and derivatives could come under pressure in a repeat of the crisis and could need the support of central bank funds.

Tighter regulations imposed on banks had raised lending costs and encouraged businesses to seek loans from other sources, he said. But while reducing the dominance of bank lending was a positive step, it could mean Threadneedle Street extending its sphere of influence to protect financial markets from collapse.

Central banks have come under increasing pressure to make sure that the next crisis in the banking sector can be handled without a taxpayer-funded bailout. A series of regulatory reforms, including demands that banks hold greater reserves and conform to strict lending rules, have reduced the risk that taxpayers will need to fund a rescue of the sector.

But Carney conceded that the job was not yet complete. He said: “The implicit [taxpayer] subsidy to banks has come down substantially but not been eliminated. We are still working to end ‘too-big-to-fail’.”

A rise in banking funding will mean that the sector will need to charge a higher rate on loans than before the crisis. For this reason, Carney said the central bank will need to cap the interest it charges banks at a historically lower rate than in the years before 2008.

The Bank has already signalled it expects base rates to rise over the next two to three years to a maximum of 3%. Such are the new regulatory costs of running a bank that they will need to limit the amount they lend and charge a higher premium on loans.

Higher charges on bank loans have encouraged a shift to borrowing from non-bank lenders and the financial markets, increasing the size and influence of the so-called shadow banking industry and the bond markets.

Carney said new regulations should prevent the collapse of a bank creating a ripple effect through other financial markets, but it was possible he would need to provide a financial backstop.