LONDON, October 28, 2008 (AFP) – Britain’s central bank urged new constraints on banks Tuesday to avoid a repeat of the financial crisis, saying there needed to be a “fundamental rethink” of how the institutions manage risk.
The Bank of England warned banks had overextended themselves during the economic boom years, lending out more than they were getting in, which helped cause “arguably” the largest episode of instability since the first world war.
In its bi-annual financial stability report, the bank’s deputy governor, John Gieve, called for “a fundamental rethink of how to manage systemic risk internationally”.
The government was forced to re-capitalise three of Britain’s high-street banks earlier this month in a 37-billion-pound (64-billion-dollar, 47-billion-euro) deal. Other nations followed suit with their ailing banks.
“Early signs suggest these measures have helped underpin the banking system,” the report said, but it warned systemic problems remained that would allow banks to repeat their mistakes.
It noted the overextension problem — in 2001, customer lending in Britain was roughly comparable to customer deposits. By 2008, banks were lending 700 billion pounds more than the deposits they w