Lord Darling: 'Alarms bells ringing for UK economy'

Labour peer Lord Darling has told the BBC that "alarm bells" should be ringing on the UK economy.

In an interview with Radio 4's Today programme to mark ten years since French investment bank BNP Paribas suspended two property funds, triggering the so-called "credit crunch", Darling, who was chancellor at the time, warned against regulatory "complacency" and the rise in unsecured consumer debt.

Borrowing on credit cards, personal loans and the like was risen to above £200bn for the first time since the crisis.

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However, unlike 2007, tougher regulations means banks hold much larger cash reserves against such lending. Mortgage lending, accounting for far larger sums, has also been moderated in response to stricter rules.

Nevertheless, Darling joins several other experts in warning that banks are lending more liberally at lower rates and that this should prompt greater vigilance from watchdogs.

"The lesson from ten years ago is that something that can start as apparently a small ripple in the water can become mountainous seas very quickly," he said.

"When interest rates go up - and they will go up, if not this year then certainly next year - and suddenly people find they are going to be paying more in their monthly payments, that's when you need to watch out."

Darling also discussed "the most scary moment" of the crisis, when he was called out of a meeting of eurozone finance ministers in October 2008 to take a call from Tom McKillop, then chairman of Royal Bank of Scotland.

He "said the bank was haemorrhaging money", said the peer.

"Remember this was not only the biggest [bank] in the world, it was about the same size as the entire UK economy.

"I said to him, 'How long can you last?' And what he said to me shook me to the core. He said, 'Well, we're going to run out of money in the early afternoon.'"

In response, the Labour government stepped in to provide £500bn worth of guarantees to underpin the entire financial system, while prime minister Gordon Brown encouraged similar action from other world leaders.

If the government hadn't intervened, added Darling, "there would have been blind panic throughout the entire banking system - not just in the UK, but around the world".