Events | 2009.06.18
King calls for banks to be 'cut down'
• Governor opens up deep rift with chancellor over reform of financial institutions at Mansion House gathering
• King outlines radical shake-up in stark contrast to Darling\'s attack on boardrooms
Mervyn King, the governor of the Bank of England, tonight called for banks that are "too big to fail" to be cut down to size as he opened a deep rift with Alistair Darling over the future regulation of the City.
While the chancellor used the annual Mansion House gathering of City grandees to oppose a break up of the big financial institutions, King sketched out plans for a much more radical overhaul.
He voiced opposition to high street banks having taxpayer-funded guarantees for their speculative investment banking activities and expressed scepticism about changes to regulation in the aftermath of the run on Northern Rock that would limit the Old Lady of Threadneedle Street to delivering "sermons".
In a clear divergence with the chancellor, King said: "If some banks are thought to be too big to fail, then, in the words of a distinguished American economist, they are too big. It is not sensible to allow large banks to combine high street retail banking with risky investment banking or funding strategies, and then provide an implicit state guarantee against failure."
The governor argued that "something must give".
"Either those guarantees to retail depositors should be limited to banks that make a narrower range of investments, or banks which pose greater risks to taxpayers and the economy in the event of failure should face higher capital requirements. Or we must develop resolution powers such that large and complex financial institutions can be wound down in an orderly manner. Or, perhaps, an element of all three," King said.
In contrast, Darling, in remarks released on Tuesday, which were attacked by politicians and unions for failing to signal a far-reaching overhaul of the banking system, stressed the answer was not about impeding the size of the banks. Labour has overseen the creation of Lloyds Banking Group by using a new public interest test to permit Lloyds TSB to rescue HBOS, rather than face an investigation by the competition authorities.
"Many people talk about how to deal with the big banks – banks so important to the financial system that they cannot be allowed to fail. But the solution is not as simple, as some have suggested, as restricting the size the banks," Darling explained, adding it was also important to have a system to tackle failures.
But King also criticised the new regulatory changes made after the collapse of Northern Rock in which the Bank is responsible for financial stability, but the Financial Services Authority is in the front seat in deciding whether a bank is failing.
"To achieve financial stability the powers of the Bank are limited to those of voice and the new resolution powers. The Bank finds itself in a position rather like that of a church whose congregation attends weddings and burials, but ignores the sermons in between," he said.
"It is not entirely clear how the Bank will be able to discharge its new statutory responsibility if we can do no more than issue sermons or organise burials," King added.
He also expressed divergent views to Darling who made an assault on boardrooms by saying they should have "the right people, skills and experience to manage themselves effectively".
King put it differently. "Blaming individuals is no substitute for acknowledging the failure of a system, of a certain type of banking. We have a real opportunity now to put that right and regain the trust that has been lost."
The Conservatives have already called for a break up of banks that are "too big to fail" and signalled a willingness to dismantle Lloyds Banking Group and Royal Bank of Scotland.
Vince Cable, the Liberal Democrat Treasury spokesman, concurred with the governor on the issue of sprawling banking empires. "The concept of private banks being \'too big to fail\' is an economic and democratic outrage. Either they must be subject to tight state control or they should be broken up so that they are no longer \'too big to fail\'," Cable said.
He added: "Alistair Darling has thrown in the towel when it comes to the big banks. Self-regulation got us into this mess and to continue with business as usual would be madness. What we need is a radical reform of the City of London."
King called on the banking industry to win back the trust of the public as the crisis has "wreaked havoc" on the wider economy through rising unemployment, which yesterday hit a 12-year-high of 2.26 million.
King contrasted the billions of pounds poured into shore up the banking system with that offered directly to the public affected by the crisis. "It is the banking system that has received financial support on an almost unimaginable scale. We who work in the financial sector have much to do to regain the trust of those who work outside it. \'My word is my bond\' are old words, but they were important. \'My word is my CDO-squared\' will never catch on," King said.
Unite, Britain\'s biggest union, also highlighted the plight of the unemployed. "You only have to look at the latest unemployment figures, the highest in 12 years, to see what the bankers have done to our economy. Tinkering with the regulatory system is not an option, there needs to be radical reform," said Derek Simpson, Unite\'s joint general secretary.
He added: "Working people in the UK are justifiably angry about the behaviour of bank bosses, for causing the crisis and for slashing jobs in banks as a result of it."
He called for unions to have a seat on the board of UK Financial Investments, which looks after the taxpayer stakes in the bailed out banks.
For more information, please visit
http://www.guardian.co.uk/business/2009/jun/17/king-in-bank-reform-call
