Some institutions more fallible than others

Date: 23/01/1997

WHEN the UK's oldest merchant bank discovered two years ago that one of its star traders had run up losses bigger than its capital base, it could not rely on the state to pick up the tab.

On a Sunday afternoon in February 1995, the Bank of England issued a carefully-worded statement that Barings had gone bust but insisted this said nothing about the rest of the banking system.

“That approach informs our whole philosophy,” says a spokesman for the central bank. “We believed this was a Barings-specific incident since it was unauthorised activity at its root.”

Nevertheless, using the same rule of thumb has led this most cautious of institutions to intervene in the markets when necessary.

Soon after BCCI collapsed in July 1991 with losses of 8 billion ecu, the Bank of England provided liquidity to a series of second-tier banks to keep them going. These borrowed heavily from American and Japanese banks, which had started to withdraw their deposits, and secured much of their lending against property, where prices were falling.

“If we had just left them alone, it could have had a domino effect and undermined the whole market,” says the spokesman.

But it has been 12 years since the Bank of England behaved like the French authorities and intervened heavily to support a bank as it did when it bought Johnson Matthey, a merchant bank and major player in the gold bullion market, for a symbolic one pound.