The Bank governor conceded that central banks including his own should had warned that financial markets were underestimating the fragility of the banking market but should have done more.
He said: “With the benefit of hindsight, we should have shouted from the rooftops that a system had been built in which banks were too important to fail, that banks had grown too quickly and borrowed too much and that so-called ‘light-touch’ regulation hadn’t prevented any of this.”
Sir Mervyn also attacked banks for their role in the financial crisis and stressed that an overhaul of the financial system, including the ring-fencing of investment banks, was essential to make the UK economy safer.
In his speech Sir Mervyn said that in good times banks took the benefits for their employees and shareholders, while in bad times the taxpayer bore the cost.
He said: “For the banks, it was a case of heads I win, tails you – the taxpayer – lose.
“As the banks got bigger, so did the implicit subsidy – by the time of the crisis it reached many billions of pounds a year.
“The bigger banks became, the more they were seen as too important to fail and the surer markets became that the taxpayer would bail them out.”
But today King made a u-turn and said the system had failed and no one could carry the blame.
He told BBC Radio 4’s Today Programme following the lecture: “My main point was not to try to blame anyone – this was a failure of the system.
“Where the mistakes were was in not having enough policy instruments to deal with the imbalance.
“What we have now is a new financial policy committee at the bank that will be able to add to the instruments, so that when we see one part of the economy going ahead too quickly the financial policy committee can target that.”
He also conceded that the Bank may have been slow to react but claimed that it was hamstrung by the decision to move regulation to the Financial Services Authority in 1997, a reform “that would return to haunt us”.
In a veiled attack on the previous government and the regulator, King also revealed that he had pushed for a major recapitalisation of the industry in early 2008 but it was rejected because “it wasn’t a popular message”.