The Bank of England's senior executives were guilty of "groupthink" and complacency in the run-up to the country's credit crisis in 2007 , and even in the months after a leading retail mortgage lender was rescued, newly released documents have shown.
The minutes of monthly meetings between June 2007-09 of the Bank of England's board - or Court - which included some of the best-known figures in U.K. business as its non-executive directors, have just been made public following after a disclosure campaign.
They show what has been described as a general failure to grasp the danger facing the U.K. banking system in the run-up to the global financial crisis and demonstrate what prominent U.K. lawmaker, and chairman of the House of Commons' Treasury Committee, Andrew Tyrie describes as "very little sign...of any differences of view."
The minutes show that at the time of the Bank's rescue of mortgage lender Northern Rock, the then Governor Mervyn King stressed the risk of "moral hazard" - allowing banks to think they are free to take risks as the state would always be there to help them -- over the potential damage to the financial system, to very little challenge. By not stepping in and reining in the banks' high-risk activities then, this view of King's has since been credited with failing to halt the contagion in the financial system during the financial crisis.
Another example of the Bank board's failure to appreciate the risk facing the country's leading banks could be seen in the minutes for September 2007, when the credit crisis was deepening to ever more dangerous levels.
Then, in what can be described as an understatement, the Bank described the situation in markets as "still fairly serious." And in January 2008, mere months before the huge bailout of the U.K.'s two largest banks, RBS and Lloyds Banking Group, the Bank wrote of: "some latent risk in relation to individual banks getting into difficulty" and estimated that problems with the leveraged loan markets could last another "three months or so."
In May, it is suggested that "market participants were over-pricing risk."
The fallout from these problems continues today.
"During the crisis the Bank of England did not have a board worthy of the name. This mattered. And it still matters," Tyrie said.
The minutes have been released years ahead of their usual schedule as a result of the freedom of information request.
The bank's board also regularly seemed frustrated by limitations to its powers, according to the minutes. These have since changed to give it greater powers to regulate the banking industry.
Tensions between the Bank and the U.K.'s Treasury, at that point led by Alistair Darling, also spill out into the minutes.
At one point, as Darling was trying to get new banking legislation rushed through, the Bank expresses "significant concerns about the timetable and, in some respects, the level of expertise within HM Treasury."
In April 2008, after the Treasury proposed keeping banks afloat via asset swaps, one unnamed member of the board called the fact such a proposal was being considered "a sad day for all concerned".
"There was concern that there were no consequences being imposed on banks in return for the scheme, in terms of raising capital, reducing dividends and management sanctions, or any changes to the regulatory environment. It was suggested that the payment of very large bonuses to bank executives would continue," the minutes read.
The level of debt which the U.K. was getting into via the banking bailout also appears to have been seriously underestimated by the Bank.
In February 2009, Paul Tucker, then deputy Governor, estimated that the present situation might result in "increases in debt between 40-70 percent of gross domestic product", whereas it is currently close to 80 percent.
While leaks to the media of information around the appointment of a new Deputy Governor seemed to cause concern among the board, news reports of the nationalization of Northern Rock appeared less so.
"This leak was much more serious. The Court could not be certain at the time that it had not come from within the Bank. But it took no action," Tyrie said.
Mark Carney, the current Governor of the Bank of England, who succeeded King in 2013, said: "The financial crisis was a turning point in the Bank's history.
"The Bank is committed to increased openness and transparency and these minutes, in combination with the other recent reviews, provide a complete record of the Bank's activities during the crisis."
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