FT: City suffers 'damage' from Rock crisis

28 November 2007

London's reputation as a financial centre has been damaged by the Northern Rock crisis, said Sir David Walker, the City grandee. He warned the credit squeeze was "materially worse" than initially expected. "I think we've had a pretty serious blip," said Sir David, a senior adviser at Morgan Stanley, a former financial regulator and author of the new guidelines on disclosure for private equity, in a video interview with FT.com's View from the Top.

 

"I think there was, abroad in the United States and in Europe in particular, a sense that the UK could manage these things quietly and smoothly, as we have always done in the past," said Sir David. "So, I think there is some damage to our reputations."

 

Pointing the finger over the Northern Rock crisis at the Bank of England, Sir David said: "My own position would now be, which is not where I started, that I'd like to see the Bank doing more to put liquidity into the home market." "Perhaps had that been done . . . the beginning of this unhappy sequence, that would not have attracted the sort of publicity that now surrounds Northern Rock, many of the difficulties we now have could have been avoided," he said.

 

Sir David defended the tripartite system of splitting financial regulation between the Bank, the Treasury and the Financial Services Authority. However, he said: "I think the way it was used had perhaps not been tested adequately in advance." Predicting the credit squeeze would continue "well into the spring", he warned it was likely to cause more problems for the financial system as the year-end approached and the commercial paper market dried up.

 

"There will be a difficult time through the year-end phase in the markets, when a lot of people had planned to be able to be reliant, for example, on the CP [commercial paper] market, which may effectively cease to exist around the year end," he said. The credit squeeze has increased Sir David's concerns about the sustainability of the business model for big "bulgebracket" banks, most of which have suffered heavy losses from the subprime mortgage crisis.

 

"I have a profound concern about whether banks that have more than 100,0000-150,000 people doing business in a whole variety of functions are capable of being managed with the sort of ethos and culture that I believe is hugely significant," he said.

 

He admitted there had been "a degree, for all of us, of unreality, perhaps self deception" over the creation by big banks of special purpose vehicles, such as those that HSBC this week took back on to its balance sheet. Yet Sir David still managed a note of optimism on the City's prospects. "Can we escape this situation with lessons clearly learned? My answer is a robust positive. This is all reparable."

 

© Graham Bishop