Sir Mervyn King has called for an end to bankers being “demonised” for their role in the financial crash, insisting the problem was with the system rather than individuals.
The outgoing governor of the Bank of England said there was a failure to adequately regulate the financial sector and society had given “too much status” to those in the City.
Sir Mervyn also warned that Chancellor George Osborne’s plan to boost the housing market must not become a permanent scheme because it was “too close for comfort” to a general state guarantee for mortgages.
Bankers who presided over the collapse of their institutions have been the subject of angry attacks from politicians, the public and the press, with RBS chief Fred Goodwin stripped of his knighthood and last month former HBOS chief executive Sir James Crosby offering to renounce his own honour, along with a third of his pension.
Sir Mervyn said bankers were only part of the problem which led to the meltdown.
He added: “What bankers did was not the only explanation of the crisis that we had.
“What we had was a world in which interest rates had become very low. Investors of all kinds – not just banks – were desperately searching for ways in which they could earn more return, so they took big risks. Those risks, some of them, went wrong.
“Where the banks contributed to the problem was that they themselves had taken too many risks on their balance sheet and they simply didn’t have enough capital to absorb the losses that were likely to come along. People took fright, they lost confidence in the banks. They wouldn’t provide money to the banks so the banks couldn’t lend to businesses or households.
“I would say to people, though, don’t demonise individuals here. This wasn’t a problem of individuals, this was a problem of a failure of a system.
“We collectively allowed the banking system to become too big. We gave it far too much status and standing in society and we didn’t regulate it adequately by ensuring that they had enough capital. We have to put that right.”
Sir Mervyn said the reforms being made to the way the City was regulated would result in a “revolution in the way in which banking is handled and we will be able to be proud again of British banking”.
He added: “We have a bit further to go, but we are not far from it and in the next one to two years we will get there.”
Sir Mervyn raised concerns about the Chancellor’s Help to Buy scheme, which will see the government guarantee up to 15 per cent of a mortgage on properties worth up to £600,000. The scheme, which starts in January next year, is due to run for three years. Sir Mervyn warned it must not become permanent.
He said: “I’m sure that there is no place in the long run for a scheme of this kind.
“This scheme is a little too close for comfort to a general scheme to guarantee mortgages.
“We had a very healthy mortgage market with competing lenders attracting borrowers before the crisis, and we need to get back to that healthy mortgage market.”