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Autumn's market mayhem has left the world's financial institutions nursing losses of $2.8tn, the Bank of England said today, as it called for fundamental reform of the global banking system to prevent a repeat of turmoil "arguably" unprecedented since the outbreak of the first world war almost a century ago.
In its half-yearly health check of the City, the Bank said tougher regulation and constraints on lending would be needed as policymakers sought to learn lessons from the mistakes that have led to a systemic crisis unfolding over the past 15 months.
The Bank's Financial Stability Report, which will be sent to every bank director in Britain, more than doubled the previous estimate of the potential losses faced by all financial institutions since the spring, but said that given time the actual losses could be pared by between a third and a half.
The £50bn pledged by the government had helped underpin the system, the Bank said, and would provide a breathing space for UK banks so that they did not have to sell assets at cut-price values immediately. The report also expressed cautious optimism about the effectiveness of the recent global bail-out plan.
The Bank's estimate of the losses is more than double that made recently by the International Monetary Fund, which concentrated on US institutions and did not include losses from the global turmoil of recent weeks. Estimated paper losses from UK banks on mortgage-backed securities and corporate bonds currently stand at £122.6bn, the report said.
In another turbulent day on global markets, there were hefty overnight falls in Asian stockmarkets and a fresh fall in the pound. Japan's Nikkei index closed down by more than 6% at a 26-year-low of 7162.9, but London's FTSE 100 recovered from an early fall of more than 200 points to close 30 points lower at 3852.6 following a steady opening on Wall Street.
Gordon Brown insisted yesterday that it was right for the government to increase borrowing in order to fund investment to help the economy through tough times. But he moved to reassure markets that he would not preside over a reckless increase in borrowing during the recession and said he would reduce it as a proportion of GDP once the economy picks up.
"The responsible course of government is to invest at this time to speed up the economic activity," Brown said. "As economic activity rises, as tax revenues recover, then you would want borrowing to be a lower share of your national income. But the responsible course at the moment is to use the investments that are necessary, and to continue them, and to help people through very difficult times.
"I think that's a very fundamental part of what we are doing."
Brown and Peter Mandelson, the business secretary, served notice that Britain should brace itself for a downturn when they both warned about rising unemployment. Brown said: "I can't promise people that we will keep them in their last job if it becomes economically redundant. But we can promise people that we will help them into their next job."
Mandelson was blunter as he warned of the impact of the recession.
"We are facing an unparalleled financial crisis," he said during a visit to Moscow. "I don't think yet people have realised what the impact is going to be on our real economy."
The Tories intensified their attacks on the government, by depicting Brown as not a man with a plan, but a man with an overdraft.
Responding to Brown's remarks, George Osborne, shadow chancellor, said: "What they are talking about is borrowing out of necessity, not out of virtue. Gordon Brown is a man with an overdraft, not a man with a plan. He is being forced into this borrowing. He presents it as a strategy but it is actually a consequence of his great failure that borrowing is already out of control before we even get into the worst of the economic circumstances that we are in."
Brown was speaking as the Treasury finalised plans to rewrite the prime minister's fiscal rules which have governed his approach to the economy over the past decade. Alistair Darling will use his pre-budget report next month to say that it is time for a more flexible approach in the new economic cycle which started in 2006-07.
The previous FSR in April envisaged a gradual recovery in global markets and the Bank was careful today not to sound the all-clear despite the coordinated action in Britain, the US and the eurozone earlier this month to recapitalise banks and provide extra liquidity to markets. "In recent weeks, the global banking system has arguably undergone its biggest episode of instability since the start of the first world war," it said.
Sir John Gieve, the Bank's deputy governor for financial stability, added: "With a global economic downturn under way, the financial system remains under strain. But it is better placed as a result of the exceptional package of capital, guaranteed funding and liquidity support. That is helping to underpin the banking system both directly and by demonstrating the authorities' determination to do whatever is needed to restore confidence.
"Looking further ahead, we need a fundamental rethink of how to manage systemic risk internationally. We need to establish stronger restraints on the build-up of risks in the financial system over the cycle with the dangers they bring to the wider economy.
"That means not just increasing capital and liquidity requirements for individual institutions but relating them to the cyclical growth of risk in the system more broadly. Counter-cyclical policy of that sort should complement regulation of companies and broader macroeconomic policy."
The Bank believes that the capital injection from the taxpayer would also prevent banks from slashing their lending too aggressively over the coming months, relieving the recessionary pressure on the economy.
Figures released yesterday, however, from financial data provider Moneyfacts showed banks were failing to pass on interest rate cuts to mortgage borrowers despite making severe cuts in savings rates. It said most institutions had already passed on the last 0.5% base rate cut to savers while holding back on cuts in home loans interest rates.
"Some providers are using the base rate cut as a way of increasing their margin for risk, by not passing on the full cut to mortgage customers but passing the cut on in full to savings customers," it said.
A separate study last week marked a new low in the number of mortgage products available.
Concerns at widespread job losses across the finance sector prompted unions to demand a "social contract" to protect jobs. Derek Simpson, Unite's joint general secretary, said: "Workers in the financial services are facing insecurity as the world is gripped by economic turmoil. The Unite 'social contract' sets out the principles which employees expect the government and finance companies to now sign up to.
"Unite is calling for the protection of jobs, pensions, the end to short-term remuneration policies and an overhaul of the regulatory structures in the financial services sector. There must be a recognition of the importance of employment in the financial services sector, as many communities now depend on the sector since being decimated by the collapse of the manufacturing industry.
"Workers in the financial services industry are not the culprits of the credit crunch and we are not prepared to allow them to become the victims. The taxpayer must now get firm assurances that the financial lifeline extended to these large organisations will be used to protect jobs and the public. It is not acceptable for the government to socialise the risk without allowing the wider society to capitalise on the rewards in the finance industry."
How much is that?
The Bank of England may have put the paper cost of the global crisis at a staggering $2.8 trillion, but how does one come to grips with such a sum? Think of it like this: it could pay for 46 bail-outs of the kind the Treasury handed to RBS, HBOS group and Lloyds TSB; or pay off the last quarter's public debt 45 times. It is more than three times the sum of UK annual public spending, and also equivalent tothe wealth of 100 Oleg Deripaskas - pre-credit crunch anyway. It's 138m bottles of 1947 Petrus Pomerol, the bankers' favourite vintage; or, if it's your coffee round, 773bn lattes - nearly 13,000 each for every UK citizen.
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