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DERMOT MURNAGHAN: Well while the politicians argue over how to get the economy on its feet again, the Bank of England is trying to make sure we don’t suffer another banking crisis. They’ve asked the government for greater powers to enforce better accounting and better communication in the banking industry but what about the bonuses. Well I’m joined now by the Bank of England’s Executive Director for Financial Stability, Andy Haldane. A very good morning to you Mr Haldane.

ANDY HALDANE: Good morning.

DERMOT MURNAGHAN: I mean you’re warning, I’ve been reading and you have just warned that there may be another huge shock out there and you feel the banks still aren’t sufficiently prepared to deal with it.

ANDY HALDANE: Well it is certainly true that over the last month or so, financial market conditions have improved somewhat, the European situation has normalised to a degree but as you say, Dermot, the risk is still very considerable and our message to the banks this week was to build their defences, to do some more insurance, to guard against the chance of things taking a turn for the worst perhaps later in the year.

DERMOT MURNAGHAN: Well raise external funds was one of your recommendations, where might those funds come from?

ANDY HALDANE: Well some I think could come from internally. Banks are still making profits, they are still distributing healthy amounts to shareholders as dividends, to staff as bonuses and there is somewhat more they could do I think.

DERMOT MURNAGHAN: So cut the dividends, cut the bonuses?

ANDY HALDANE: To a degree, that will get you some distance, but we’ve also said that we recognise that those bonuses have already been trimmed somewhat, that profits aren’t what they used to be in the banking industry and therefore they may need to seek funds from the capital markets, to raise external equity from the financial markets.

DERMOT MURNAGHAN: But a lot of banks say we can’t do that because nobody wants to invest in us!

ANDY HALDANE: Well the financial markets are somewhat better than a few months ago and the prices of these securities is actually quite cheap. If you are an investor right now it would be a good time to put your money for example into the banking system so I think it’s not true to say that some banks at least couldn’t raise external funds to buttress their sea walls.

DERMOT MURNAGHAN: But you seem to be saying two different things. You seem to be saying that the banks face a large potential threat still but it is quite a good idea to invest in them. Well a lot of people would say some of them might go bust so I’m not putting my money into them.

ANDY HALDANE: I understand those concerns and of course the world remains a risky place but what we’re saying that if you are to put in place some extra protection now, the capital markets will reward you for that extra protection, they will give you more money, they will do it on finer terms and you can then on lend those funds to the real economy, to businesses, to householders.

DERMOT MURNAGHAN: Ah, so you can do that can you? I mean a lot of people would understand that if you are meant to keep that money in reserve then this is draining money out of the real economy and I know you’ve been critical of the way banks failed to meet the Project Merlin targets with the aim of lending more to small and medium sized enterprises, if they are told to retain more as this firewall against further threats, how then can they lend more out? Some of it is quite risky lending and has to be.

ANDY HALDANE: Some of the lending is risky as you say but what we are saying is build your defences, raise some extra finances, don’t stuff that under the bed. This is not mattress money, this is money we want to be put to work in the real economy, in lending to small businesses, in lending to cash-strapped households and if you could put down a marker about your safety by raising these extra funds, it would be much easier for you to on lend those funds then to those that need them.

DERMOT MURNAGHAN: It seems that you are finally getting the tough on the banks now and in terms of your financial policy committee from the Bank of England, getting this regulation. A lot of people say it is bolting the stable door etc but do you think in the past, and perhaps dimensions of the lobbying story we are talking about in politics, that the banking industry had too much influence with the likes of the Bank of England and senior politicians.

ANDY HALDANE: The big lesson or one of the big lessons from the financial crisis was that there was a gaping hole, a gaping hole in the regulatory architecture. So banks’ balance sheets ballooned ahead of the crisis on a greater scale than we have ever seen in human history and at that time who was in charge? No one was in charge. The FPC, this Financial Policy Committee, its aim is to fill that gap, is to get our arms around this credit binge – to use a metaphor of the moment – that took place ahead of crisis and the costs of which are still now being felt so that’s what the FPC is here to do, to get our arms around balance sheets, to prevent a repetition of the costs that we’ve seen.

DERMOT MURNAGHAN: But one of the biggest aspects of that bubble, of that boom, was of course the property market but you’re not getting involved with mortgages.

ANDY HALDANE: Well, not directly. What we’ve said earlier on this week is that we didn’t feel it was right for the FPC to impose direct quantitative limits on how much individual households could borrow, we felt that was a step too far.

DERMOT MURNAGHAN: But that’s one of the main things that could have prevented perhaps or mitigated the effects of the financial crisis. .

ANDY HALDANE: It’s one of the things but there are other things that could have been done too. Instead of directly restricting how much an individual borrower could borrow, couldn’t borrow at any price, what we’re saying is that instead we might try and raise the price of credit to some households, to some businesses. That’s a better way than cutting them off at the knees and saying they can’t borrow at any price.

DERMOT MURNAGHAN: But would you watch from the sidelines if, and it’s nearly there, if the 100% mortgage comes back, the 125% mortgage comes back?

ANDY HALDANE: What we’ve said is that let’s have a debate about whether it is the general public, parliament, would want to vest these tremendously intrusive powers on the Bank of England. If the answer to that is yes then I think we would be happy to take on that responsibility and to impose what you are saying. As it is, I think we already have some instruments at our disposal that can protect the system from those risks going wrong. It was those risks going wrong that caused the problems that, as I say, we’re still now experiencing.

DERMOT MURNAGHAN: And can I just ask you from the Bank of England’s point of view, you mentioned the European Central Bank and the help they have been offering directly to banks in getting money to them at very cheap rates. Is that something that the Bank of England would consider in certain circumstances?

ANDY HALDANE: Well listen, we look at the problems in Europe and what the European Central Bank has done, it has provided liquidity to buy time but no one is in any doubt that the underlying problems in Europe are not ones of money, they’re not ones of liquidity, they are ones of competitiveness, they are ones of indebtedness and those are structural problems that require structural solutions that will take time and what the ECB are doing is buying time for those structural changes to happen. It’s not a solution, it’s a sticking plaster.

DERMOT MURNAGHAN: That can is being kicked down the road a bit. Andy Haldane, thank you very much indeed.