Cost of crash: $2,800,000,000,000•

Bank of England calls for reform -

Reuters: /Autumn's market mayhem has left the world's financial
institutions nursing losses of $2.8tn, the Bank of England said today,
as it called for fundamental reform of the global banking system to
prevent a repeat of turmoil "arguably" unprecedented since the
outbreak of the first world war.

In its half-yearly health check of the City, the Bank said tougher
regulation and constraints on lending would be needed as policymakers
sought to learn lessons from the mistakes that have led to a systemic
crisis unfolding over the past 15 months.

The Bank's Financial Stability Report, which will be sent to every
bank director in Britain, more than doubled the previous estimate of
the potential losses faced by all financial institutions since the
spring, but said that given time the actual losses could be pared by
between a third and a half.

The £50bn pledged by the government had helped underpin the system,
the Bank said, and would provide a breathing space for UK banks so
that they did not have to sell assets at cut-price values immediately.
The report also expressed cautious optimism about the effectiveness of
the recent global bail-out plan.

The Bank's estimate exceeds that made by the International Monetary
Fund recently. The IMF concentrated on US institutions and did not
include losses from the turmoil of recent weeks. Estimated paper
losses from UK banks on mortgage-backed securities and corporate bonds
are currently £122.6bn, the Bank report said.

Gordon Brown insisted yesterday that it was right for the government
to increase borrowing in order to fund investment to help the economy
through tough times. But he moved to reassure markets that he would
not preside over a reckless increase in borrowing during the recession
and said he would reduce it as a proportion of GDP once the economy
picks up.

Paving the way for an expected abandonment of the tight fiscal rules
he established as chancellor, Brown said: "The responsible course of
government is to invest at this time to speed up the economic
activity. As economic activity rises, as tax revenues recover, then
you would want borrowing to be a lower share of your national income.
But the responsible course at the moment is to use the investments
that are necessary, and to continue them, and to help people through
very difficult times.

"I think that's a very fundamental part of what we are doing."

In another turbulent day yesterday on global markets, there were hefty
falls in Asian stockmarkets and a fresh fall in the pound. Japan's
Nikkei index closed down more than 6% at a 26-year-low of 7162.9.
London's FTSE 100 recovered from an early fall of more than 200 points
to close 30 points lower at 3852.6, while the Dow Jones closed down
2.42% at 8,175.77.

Brown and Peter Mandelson, the business secretary, served notice that
Britain should brace itself for a downturn when they both warned about
rising unemployment. Brown said: "I can't promise people that we will
keep them in their last job if it becomes economically redundant. But
we can promise people that we will help them into their next job."

Mandelson was more blunt as he warned of the impact of the recession.
"We are facing an unparalleled financial crisis," he said during a
visit to Moscow. "I don't think yet people have realised what the
impact is going to be on our real economy."

The Tories intensified their attacks on the government by depicting
Brown as not a man with a plan but a man with an overdraft.

Responding to Brown's remarks, George Osborne, shadow chancellor,
said: "What they are talking about is borrowing out of necessity, not
out of virtue. Gordon Brown is a man with an overdraft, not a man with
a plan. He is being forced into this borrowing. He presents it as a
strategy but it is actually a consequence of his great failure that
borrowing is already out of control before we even get into the worst
of the economic circumstances that we are in."

Brown was speaking as the Treasury finalised plans to rewrite the
fiscal rules which have governed his approach to the economy over the
past decade. Alistair Darling will use his pre-budget report next
month to say that it is time for a more flexible approach in the new
economic cycle, which started in 2006-07.

The previous FSR in April envisaged a gradual recovery in global
markets and the Bank was careful today not to sound the all-clear
despite the coordinated action in Britain, the US and the eurozone
this month to recapitalise banks and provide extra liquidity to
markets. "In recent weeks, the global banking system has arguably
undergone its biggest episode of instability since the start of the
first world war," it said.

Sir John Gieve, the Bank's deputy governor for financial stability,
added: "With a global economic downturn under way, the financial
system remains under strain. But it is better placed as a result of
the exceptional package of capital, guaranteed funding and liquidity
support. That is helping to underpin the banking system both directly
and by demonstrating the authorities' determination to do whatever is
needed to restore confidence.

"Looking further ahead, we need a fundamental rethink of how to manage
systemic risk internationally. We need to establish stronger
restraints on the build-up of risks in the financial system over the
cycle with the dangers they bring to the wider economy.

"That means not just increasing capital and liquidity requirements for
individual institutions but relating them to the cyclical growth of
risk in the system more broadly. Counter-cyclical policy of that sort
should complement regulation of companies and broader macroeconomic
policy."

The Bank believes that the capital injection from the taxpayer will
also prevent banks from slashing their lending too aggressively over
the coming months, relieving the recessionary pressure on the economy.

Figures released yesterday, however, from financial data provider
Moneyfacts showed banks were failing to pass on interest rate cuts to
mortgage borrowers despite making severe cuts in savings rates. It
said most institutions had already passed on the last half-point base
rate cut to savers while holding back on cuts in home loan interest
rates.

"Some providers are using the base rate cut as a way of increasing
their margin for risk, by not passing on the full cut to mortgage
customers but passing the cut on in full to savings customers," it
said.

A separate study last week marked a new low in the number of mortgage
products available.

Concerns at widespread job losses across the finance sector prompted
unions to demand a "social contract" to protect jobs. Derek Simpson,
Unite's joint general secretary, said: "Workers in the financial
services are facing insecurity as the world is gripped by economic
turmoil. The Unite 'social contract' sets out the principles which
employees expect the government and finance companies to now sign up
to.

"Unite is calling for the protection of jobs, pensions, the end to
short-term remuneration policies and an overhaul of the regulatory
structures in the financial services sector. There must be a
recognition of the importance of employment in the financial services
sector, as many communities now depend on the sector since being
decimated by the collapse of the manufacturing industry.

"Workers in the financial services industry are not the culprits of
the credit crunch and we are not prepared to allow them to become the
victims. The taxpayer must now get firm assurances that the financial
lifeline extended to these large organisations will be used to protect
jobs and the public. It is not acceptable for the government to
socialise the risk without allowing the wider society to capitalise on
the rewards in the finance industry."

How much is that?
The Bank of England may have put the paper cost of the global crisis
at a staggering $2.8 trillion, but how does one come to grips with
such a sum? Think of it like this: it could pay for 46 bail-outs of
the kind the Treasury handed to the banks RBS, HBOS group and Lloyds
TSB; or pay off the last quarter's public debt 45 times. It is more
than three times the sum of UK annual public spending, and also
equivalent to the wealth of 100 Oleg Deripaskas - before the credit
crunch anyway. It's equal to 138m bottles of 1947 Petrus Pomerol, the
bankers' favourite vintage; or, if it's your turn in the coffee round,
773bn lattes - nearly 13,000 each for every UK citizen.
.

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