King Must Stop Morality `Lessons' on U.K. Banking, Minford Says

By Svenja O'Donnell

Oct. 10 (Bloomberg) -- Bank of England Governor Mervyn King should stop giving banks ``lessons in morality'' and focus on preventing financial collapse, said Patrick Minford, a former adviser to Margaret Thatcher.

``The bank has been detached and not got the point that we have serious disarray in financial markets,'' Minford, who is now an economics professor at Cardiff University, said today in an interview. ``Its role is to get in there and sort it out, not make quasi-regulatory moralistic noises at this stage of the game.''

King will next week unveil a planned revamp of money-market operations to help the banking system weather the crisis. The Bank of England, which joined a global round of surprise rate cuts this week, has yet to reduce the penalty on emergency loans and the mortgage securities it accepts as collateral must have the highest credit rating.

``I think the bank has performed so badly it's asking a lot for people to trust them,'' said Minford. ``The banks themselves must feel really let down. For the Bank of England to offer extra help in giving banks a good spanking is really offensive.''

The U.K. central bank has so far refrained from lowering the margin at which they set the so-called penalty rate. The European Central Bank halved the margin it charges banks hours after the coordinated rate cuts. The Bank of England's penalty rate is set at one percentage above the benchmark rate, currently 4.5 percent, double the margin set by the ECB.

`Lessons in Morality'

``It is really not King's job to read us lessons in morality at this stage,'' Minford said. ``It's to get behind the banking system and avoid the consequences of collapse. That involves a scheme, very broadly drawn in terms of acceptable assets, the broadest range of assets to be accepted by the bank.''

The bank's emergency lending program accepts as collateral residential mortgage-backed securities issued in the U.K. or European Economic Area rated AAA, the highest level. On such securities with a maturity date more than a decade away, it will lend only 78 pounds ($134) for every 100 pounds in loan value, a ``haircut'' of 22 percent, its strictest terms. The comparable discount for government debt of similar maturity is 5.5 percent, while government agency debt is discounted by 14 percent.

``The special liquidity scheme has one major flaw: they charge a huge fee to provide liquidity,'' Minford said. ``They have been feeding the problem. They need liquidity at base rate, plus a small penalty rate.''

The U.S. Federal Reserve and other central banks on Oct. 8 delivered a coordinated round of interest-rate reductions to protect economies from the worst financial market crisis since the Great Depression. The Bank of England cut its rate by half a point after keeping it unchanged at 5 percent since April.

`Kicking and Screaming'

``The Bank of England's behavior has been a major contributor to the crisis,'' Minford said. ``They've been dragged kicking and screaming into the role they've been forced to undertake.''

Former Bank of England policy makers have said more rate cuts will be needed. Christopher Allsopp, a member of the monetary policy committee from 2000 to 2003, said that the bank will probably need to follow the rate cut with ``another big one.''

``The Bank of England is now faced with possible meltdown and deflation,'' said Minford. ``The central bank needs to get behind the banking system and avoid the consequences of collapse.''

To contact the reporter on this story: Svenja O'Donnell in London at sodonnell@bloomberg.net.