A couple of sentences caught my eye in the speech given at Liverpool University on 24 July by Alex Brazier of the Financial Policy Committee at the Bank of England to the Institute for Risk and Uncertainty.
Talking about the 2008 crash he said:
After years of stability and good performance, few had considered what could go wrong. A false sense of security grew up. At Royal Bank of Scotland – the most egregious case – that illusion meant the bank could be toppled by losses of less than one per cent of its assets.
How was that? How did that work?
And talking about complacency today he said:
Lenders extrapolate that into the future, attributing success to skill rather than chance.
Nowhere is this clearer than page 8 of the 2006 Annual Report of Northern Rock: The credit quality of our assets remains strong...The reason for this improvement is ... because we have further improved our credit scoring ...Our scorecards are highly predictive...which gives an early warning of potential default - so we are confident that the current historically low level of default will continue.
Within three years, the arrears rate on its mortgage book had increased ten-fold.
OK, I see that. In an interlocked world, events compound each other.
Then he said banks and building societies regulated by the Bank of England account for 80% of credit card and personal loan credit and 40% of car finance.
And he talked about 'the return of the regulator' and that the Bank Of England has put safeguards in place to stop banks and building societies lending wildly because of thinking that the future would be as benign as the past.
One of his most detailed warnings was about leases on cars and what might happen in an economic downturn when consumers might just return the cars to the finance company at the end of the lease period and buy a second hand car cheaper.
It would not be a default but it would mean that the finance companies would receive back less than they had lent.
So given that risk - who controls the other 20% of credit card debt and the other 60% of car finance that the Bank Of England is not empowered to regulate?