Poor financing decisions by the British banks in the recent years that lead to the financial crisis had a significant impact on the economic recovery, according to George Osborne, the Chancellor of the Exchequer.
“That has meant credit allocation has not been as efficient as otherwise it might have been,” Osborne told the Parliamentary Commission on Banking Standards yesterday.
The Chancellor of the Exchequer, however, didn’t linked impairments on the bad loans, which required a £21bn bailout at the height of the financial crisis, and Moody’s reduced the UK credit rating to AA1 from AAA due to sluggish economic growth.
Osborne also rejected the suggestion of former chancellor Lord Lawson to “use [his] power and responsibility to do the classic good bank, bad bank” split of Royal Bank of Scotland (RBS). He, however, said that it will be difficult “to justify spending up to £8bn, £9bn, £10bn” to split RBS in two to three years and reselling it.
“As the pound was already on credit watch from all the major agencies, the UK’s downgrade is not the torpedo to sink the pound that it once might have been,” said Paul Lambert, head of currency at Insight Investment, told the Financial Times.
“There’s no doubt our recovery from this financial crisis has been much more difficult than recoveries from more classic recessions,” Osborne said.
The recently introduced banking reform bill will enact far-reaching reforms under which banks’ retail activities would be separated from riskier investment banking divisions.
When asked why he had supported an enforced break-up for banks that failed to implement the ringfence but not an additional backstop measure to break up the entire sector, Osborne said he believed the idea to be undemocratic.
“I think this power, even with checks, would create some instability and I don’t really see what it provides,” Osborne said. “We’ve got a system, we’ve got to make it work [and] we’ve got some powerful sanctions now.”