Banks are taking risks and could still fail but, a decade after Northern Rock’s fall, the Bank of England says banks are now subject to much greater scrutiny.
Sir Jon Cunliffe, the Bank of England’s deputy governor for financial stability, said: “The financial crisis was a really big and very painful lesson for all of us.
“It’s not just the money that had to be put in – taxpayer money into banks – but also the crisis and recession that followed on average meant that everyone in the UK was probably about £20,000 worse off than they would have been.
“So I think it’s really important that we’ve learnt the lessons and that system is safer – I do think it’s safer, simpler and stronger than it was before the crisis.”
His words come as the country marks a decade since the failure of Northern Rock, one of the events which preceded the financial crisis.
They also came just hours after a report was published by the Adam Smith Institute criticising the Bank of England’s “stress tests”, which are intended to measure whether a bank is capable of surviving a major economic shock.
Sir Jon said banks had been stopped from some of the “risky activities they were taking” by the Bank of England’s rules and “much more intrusive supervision of the banks and their operations”.
He added: “Banks have to take risks and those risks will sometimes go wrong and banks will make losses but you have to make sure that when they make those losses, they can absorb them without just falling over.”
But he said banks were better prepared than they were before the financial crisis, with around 10 times as much capital and around four times as much liquidity (approximately £600bn).
These advantages should mean a bank is better prepared for a situation where it can no longer borrow in the market.
“Banks may well fail but you have to ensure that if a bank fails it can do so safely without just cutting off the services it provides to the economy.
“It was because banks couldn’t fail safely without cutting off those services that the taxpayer had to step in during the crisis to save the economy from the banks.”
Sir Jon said the Bank of England is putting in place a regime to ensure that if a bank fails, it can be “wound down safely and the losses can be borne by the people who profit from the bank’s good times, not by the taxpayer”.
The event most likely to worry banks in the next few years is the UK’s departure from the European Union but Sir Jon was confident the Bank of England was capable of helping the financial sector weather the possible storm.
The Bank is monitoring the financial industries in the UK and the EU firms that operate in the UK regarding their plans for Brexit, he said.
“If we start to see financial stability risk coming out of those plans…then we’ll take action to monitor that.”