Banks and industry regulators should never have allowed the current woes facing the UK financial sector to develop, a north economist said yesterday.
Tony Mackay said he was shocked by the scale of the fall-out from the credit crunch and the level of writedowns being announced by UK banks.
He said: “The International Monetary Fund has estimated that the financial sector (worldwide) faces potential losses of nearly £500billion as a result of the credit crisis.
“In addition to losses announced to date on sub-prime mortgages, the fund expects further losses and writedowns on prime mortgages, commercial real estate, leveraged loans and consumer finance. Banks will suffer about half of the losses, with the rest shared between insurance companies, pension funds, hedge funds and other investors.”
The figure put on the losses so far was incredible, said Mr Mackay, adding: “It is difficult to comprehend the magnitude and also how the financial crisis occurred on such a scale.”
Mr Mackay said he was also shocked by the Royal Bank of Scotland Group and Bank of Scotland owner HBOS reporting credit-crunch writedowns of £5.9billion and £2.8billion respectively.
These two banks also launched rights issues, worth £12billion at RBS and £4billion at HBOS, to raise money to boost their capital after being hit by their exposure to the US sub-prime market.
Mr Mackay said: “I do not understand how the senior management at banks like RBS and HBOS allowed themselves to get involved so heavily.
“The financial regulators deserve even more criticism. Both the Financial Services Authority and the Bank of England failed to carry out their responsibilities properly.”
The crisis that ultimately led to the nationalisation of Northern Rock had highlighted major deficiencies in the system, which the UK Government was now seeking to put right, said Mr MacKay, whose latest monthly report on the Scottish economy also took a swipe at RBS chief executive Sir Fred Goodwin.
Mr Mackay said last year’s £54.1billion RBS-led takeover of Dutch investment bank ABN Amro was mistimed, adding: “Many people have had reservations about Sir Fred’s aggressive expansion strategy and because of that the RBS share price has long underperformed others in the industry.”
The British Bankers’ association defended the record of its members, saying they were the victims of a financial crisis that had originated in the US and spread worldwide.
It added: “British banks are not themselves sub-prime lenders, but have nonetheless been affected by the situation.”