Governor warns 'innocent bystanders' will lose homes

From Times Online
June 10, 2008

Grainne Gilmore

Mervyn King, Governor of the Bank of England, today launched an attack on excessive risk taking by banks and financial institutions and gave warning that "when the party ends, some innocent bystanders may lose their homes altogether."

Speaking at the British Bankers' Association annual conference, Mr King also said that if banks were convinced they would be bailed out by the Bank of England if they failed, "then over time the parties will become wilder and wilder."

Mr King said a range of financial institutions such as investment banks, monoline insurers and hedge funds had the "potential to cause significant damage to the economy in the wake of their demise."

This attitude among banks had damaged consumers, he said, adding: "When the party ends, some innocent bystanders may lose their homes altogether."

New figures from the Council of Mortgage Lenders this morning showed that more than 23,000 homeowners who took out 100 per cent mortgages in the 12 months to March face holding negative equity after the slide in house prices.

Mr King also outlined plans to make the Special Liquidity Scheme, set up to provide extra funding to mortgage lenders during the mortgage drought, a permanent fixture.

He said: "We intend to learn from the experience of the scheme to put in place a liquidity facility that works in all seasons - both 'normal' and 'stressed'". He said that the Bank was also to address the problem of the "stigma" attached to banks that use central banks' facilities.

Mr King also painted a bleak picture of the current economy, stating: "After a decade or more of economic stability, we are now facing a period of rising inflation and falling economic growth.

"Part of the reason for this change of economic weather is that we are passing through the most prolonged period of financial turmoil that most of us can remember.

"Whether, as the IMF has argued, it is the worst period of financial stress since the 1930s is too early to judge. After all, the crisis is not yet over."

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