King moots breaking up banks
Governor at odds with Darling on ability of capital rules to rein in risks
October 22, 2009
By Jennifer Ryan London
Bank of England governor Mervyn King has stepped up his call for governments to tackle the dangers posed by banks "that are too important to fail", saying new capital rules would not shield taxpayers from funding any future bailouts.
"The massive support extended to the banking sector around the world, while necessary to avert economic disaster, has created possibly the biggest moral hazard in history," he said in a speech late on Tuesday.
King said that a solution could be to split up banks and separate riskier activities from more stable businesses such as taking deposits.
Officials are debating how to rein in the world's biggest banks after their near-collapse threatened to capsize the global economy. While King said more stringent capital rules would not necessarily create a safety cushion large enough for banks to weather every crisis, his stance was at odds with that of UK Chancellor of the Exchequer Alistair Darling.
"Capital requirements reduce, but do not eliminate, the need for taxpayers to provide catastrophe insurance," King said. He added that it was "hard to see why" proposals such as those of former US Federal Reserve chairman Paul Volcker to separate proprietary trading from retail banking were "impractical".
By contrast, Darling said on Tuesday that focusing on capital rules might be enough to ward off future crises. He was unswayed by arguments that banks should be broken up.
"You regulate according to risk," Darling said before King's speech. "The greater the risk, the greater the capital requirement.
"I don't think an arbitrary split would deal with the problem."
King gave no indication in his speech whether the central bank would expand its bond-purchase programme next month. The bank's rate-setting monetary policy committee has lowered the benchmark rate to record low of 0.5 percent this year.
King wrote in Scotland's Herald newspaper yesterday that interest rates were "extremely low" and warned Britons to prepare for increases "at some point". He did not know when rates would return to "more normal levels", but said "it would be wise to take this into account in your financial planning".
He wrote that the UK "must rebalance our economy away from spending - both public and private - and towards saving and investment".
Meanwhile British Prime Minister Gordon Brown faces mounting criticism for bailing out the financial system with public money as the recession strains public finances.
Brown said last month he was working on a Business and Financial Services Bill that would "ban the old bonus systems" and require banks to keep a "living will" that would allow regulators to wind them down in the event they went bankrupt.
"The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion," King said in his speech.
The Conservatives used King's remarks to criticise the government.
"Mervyn King's speech is powerful and persuasive," Tory finance spokesman George Osborne said.
"His analysis of how the government's system for regulating banks failed and how there has been 'little real reform since' is one I share."
King said the UK banking system was "highly concentrated" and greater competition was needed to reduce the dependency of households and businesses on just four institutions. The government owns 70 percent of Royal Bank of Scotland and 43 percent of Lloyds Banking Group.
Barclays and HSBC Holdings are the country's other biggest banks.
On the economy, King said activity was showing "encouraging" signs.
London's FTSE-100 index has surged almost 50 percent since March and economists expect the Office for National Statistics to say tomorrow that the country emerged from the worst recession since World War II in the third quarter.
"It is likely that in the second half of this year, the UK economy will return to positive, if modest, growth," King said. - Bloomberg
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