Burt is urging the Bank of England to relax the rules on how banks account for assets on their balance sheets. This would take some strain off the banks and encourage them to start lending to each other and to customers.
Under the current Basel II accounting regulations, banks must “mark to market” assets. This rule does not make sense in the current turmoil because there is no market for even quality assets, and banks have to take inappropriately heavy write-downs, Burt told The Sunday Telegraph. One consequence is banks are too nervous to lend to each other because of potential blackholes which their counterparties might be sitting on, the banker said.
“To the proverbial visitor from Mars, the problem and its solution might seem clear. In the past week, I have been told by senior bankers and customers of having mark down assets of undoubted value. No bank will lend or invest if, by doing so, they have to take an immediate write down as a result of being required to mark the asset to an unrealistic market price,” Sir Peter said.
“With an increasingly severe contraction of credit – likely to be exacerbated if Northern Rock actually does manage to repay £24bn to the Government in the next year - and with interest rates stuck stubbornly above base rate, the UK is facing an increasing risk of a slowdown turning into a recession,” Burt added.
Burt said the injection of liquidity into the system by the Bank of England and its recognition of the seriousness of the credit crunch was “very welcome”.
But he added that it had not succeeded in unfreezing the market of banks lending to each other. Mervyn King, the Bank’s governor, and the Government should push for a relaxation of the rules, so that banks do not have to mark their assets to market, Burt insisted.
“As Keynes reportedly said: 'When the facts change, I change my mind',” he said.
