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Announce New Banking Controls after Johnson Matthey Collapse

June 20, 1985

LONDON (AP) _ The British government on Thursday announced tough new banking controls following last year’s collapse of Johnson Matthey Bankers Ltd., one of Britain’s biggest gold dealers.

The measures, including rigorous Bank of England supervision of all institutions and new rules for bank auditors, are designed to prevent the questionable lending practices that dragged Johnson Matthey Bankers under.

Chancellor of the Exchequer Nigel Lawson told the House of Commons that the Johnson Matthey collapse was the result of the company greatly overextending itself with loans. He said the latest estimate of its losses was $315 million.

Legal action will be taken against the company’s auditors, Arthur Young and Co., Lawson announced.

He also criticized the Bank of England for ″failing to respond more quickly to the danger signals.″

But he said the bank had acted properly when, fearing a collapse of the gold market, it stepped in on Sept. 30, 1984, to take over Johnson Matthey Bankers, the banking and gold-trading arm of Johnson Matthey PLC. Opposition Labor Party lawmakers have attacked the rescue.

The Bank of England was forced to bail out Johnson Matthey and more than a dozen other banks after loans to two groups of companies run by businessmen from Pakistan went bad. The loans amounted to more than 100 percent of Johnson Matthey Bank’s capital, Lawson said.

Johnson Matthey is a famous old name in the gold business. It’s one of five big bullion houses that ″fix″ a recommended price of gold twice daily.

Until now, Britain’s banking sector has enjoyed a large degree of freedom from government regulation.

″But the banking industry has expanded rapidly, and its activities have diversified,″ Lawson told lawmakers. ″Recognized bank status - as we have seen with JMB - has not always guaranteed prudence and responsibility.″

He said the government would introduce in Parliament a new banking bill ″as soon as possible.″

Its provisions, he said, will include abolition of the two-tier supervision system currently employed by the Bank of England under which it keeps close track of so-called ″licensed deposit-takers″ - a limited-services type of bank - but largely leaves full-fledged banking institutions to police themselves.

All will get close supervision under the new regime, Lawson said. He also said there will be tighter criteria for registration in the system.

Lawson said he also planned to eliminate confidentiality rules preventing contact between bank supervisors and auditors.

″You can’t rely on the old boy rules any more,″ Lawson said in an interview. ″You can’t rely, alas, on mutual trust. You have to rely on rigorous scrutiny.″

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