Mervyn King, governor of the Bank of England, called on Tuesday night for banks to be split into separate utility companies and risky ventures, saying it was âa delusionâ to think tougher regulation would prevent future financial crises.
Mr Kingâs call for a break-up of banks to prevent them becoming âtoo important to failâ puts him sharply at odds with the direction of domestic and international banking reform.
The Treasury and the Financial Services Authority have specifically rejected the idea of spliting up the banks, while the Conservatives think action in Britain alone along these lines would not be feasible.
Internationally, the proposals of the Group of 20, the Financial Stability Board and the Basel Committee have been aimed primarily at raising the quantity and quality of banksâ capital to make future banking failures much less likely.
Mr King borrowed Churchillian language in a speech in Edinburgh to highlight the burden banks had placed on taxpayers. âNever in the field of financial endeavour has so much money been owed by so few to so many. And, one might add, so far with little real reform.â
The forcefulness of Mrâs Kingâs language reflects his belief that the structure of the banks needs to be put firmly on the international regulatory agenda, where focus has been on strengthening capital and regulating bankersâ pay.
The Bank governor wants to see the utility aspects of banking â payment systems and deposit taking â hived off from more speculative ventures such as proprietary trading. âThere are those who claim that such proposals are impractical. It is hard to see why,â he said.
Although he said that ideas to force banks to hold debt that automatically turns into equity in a crisis were âworth a tryâ, he downplayed their likely effect. âThe belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusionâ.
It is likely that Mr Kingâs words will again irritate the Treasury. In its summer white paper, the Treasury said there was no evidence that separation would have worked to allow banks to fail safely.
Instead, it believes that the proposal for banks to arrange in advance for their orderly death with so-called âliving willsâ would provide effective separation in a future crisis.
Mr King, while supporting such wills, said their downside was they required heavy regulation and costly oversight.
Many experts believe that the governor will get his way on separation, but by default rather than by design, because proposals for tighter capital regulations on risky parts of banking will make these unprofitable and banks will choose to ditch them.
http://www.ft.com/cms/s/0/7056b56a-bda8-11de-9f6a-00144feab49a.html?nclick_check=1
Mr Kingâs call for a break-up of banks to prevent them becoming âtoo important to failâ puts him sharply at odds with the direction of domestic and international banking reform.
The Treasury and the Financial Services Authority have specifically rejected the idea of spliting up the banks, while the Conservatives think action in Britain alone along these lines would not be feasible.
Internationally, the proposals of the Group of 20, the Financial Stability Board and the Basel Committee have been aimed primarily at raising the quantity and quality of banksâ capital to make future banking failures much less likely.
Mr King borrowed Churchillian language in a speech in Edinburgh to highlight the burden banks had placed on taxpayers. âNever in the field of financial endeavour has so much money been owed by so few to so many. And, one might add, so far with little real reform.â
The forcefulness of Mrâs Kingâs language reflects his belief that the structure of the banks needs to be put firmly on the international regulatory agenda, where focus has been on strengthening capital and regulating bankersâ pay.
The Bank governor wants to see the utility aspects of banking â payment systems and deposit taking â hived off from more speculative ventures such as proprietary trading. âThere are those who claim that such proposals are impractical. It is hard to see why,â he said.
Although he said that ideas to force banks to hold debt that automatically turns into equity in a crisis were âworth a tryâ, he downplayed their likely effect. âThe belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusionâ.
It is likely that Mr Kingâs words will again irritate the Treasury. In its summer white paper, the Treasury said there was no evidence that separation would have worked to allow banks to fail safely.
Instead, it believes that the proposal for banks to arrange in advance for their orderly death with so-called âliving willsâ would provide effective separation in a future crisis.
Mr King, while supporting such wills, said their downside was they required heavy regulation and costly oversight.
Many experts believe that the governor will get his way on separation, but by default rather than by design, because proposals for tighter capital regulations on risky parts of banking will make these unprofitable and banks will choose to ditch them.
http://www.ft.com/cms/s/0/7056b56a-bda8-11de-9f6a-00144feab49a.html?nclick_check=1