Britain is still unprepared for another financial crash and its banks have yet to strenghten their reserves sufficiently to survive another crisis, according to a senior Bank of England official.
In a speech at the London School of Economics, he said the Bank's policy of quantitative easing and maintaining low interest rates, combined with similar policies in the US and Japan, could also cause problems as investors attempt to predict how and when cheap credit will be withdrawn.
The warning shot is Sharp's first venture into public debate since joining the FPC last year. A former Goldman Sachs partner and private equity expert, Sharp is well-known in government circles after George Osborne recruited him to be one of four City figures to "question the unquestionable" as part of the Treasury's austerity drive.
Sharp said a shock to the economy could come from any direction or part of the world and was inheritently unpredictable. Given this uncertainty, he said: "Please do not expect an omniscient committee which, by their collective capabilities, can always successfully anticipate shocks. While we will do our best to anticipate shocks and minimise the possibility of them arising, it is better that the FPC should be viewed as unequivocally accountable for ensuring that, when such shocks do occur – and indeed they will – the system has built up sufficient strength and resilience so that such events can be effectively managed."
He said the UK's banks were on course to build sufficient reserves to withstand further shocks, but had yet to reach their goal.
He added that five things worried him about his job. "First, that the last crash occurred partly as a result of central bank and regulators' failure to appropriately assess risks to the system and the resilience of the systems – and that I now find myself accountable to make sure this does not happen again.
"Second, the UK's economic position is still fragile.
"Third, we have a banking system that is still somewhat undercapitalised, although it is on an agreed transition path to a higher level of capitalisation.
"Fourth, global quantitative easing has led to asset price inflation which may involve some fragility in markets, in particular if there is a sharp snap-back in rates.
"Fifth, our economy is vulnerable to external shocks. There is some fragility in Asia, both with respect to potential growth and the financial system, and of particular concern our biggest trading partner – Europe – is flirting with deflation."
In addition, he was concerned that measures to boost demand, such as low interest rates and quantitative easing were just raising asset prices and causing investors to hoard wealth, reducing economic activity.
"It is perfectly conceivable that new shocks or difficulties are just around the corner," he said.
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