Breaking up the banks is the only way to avoid future crises, says King

Breaking up the banks is the only way to avoid future crises, says King


The only way to prevent future financial crises is to split the banks in two, Bank of England governor Mervyn King said in a speech last night.

In a move that is likely to widen the growing gulf between the central bank and the Treasury, King said current plans to prevent a similar disaster through regulation are doomed to fail

Running through the current planned reforms he said moves to force banks to hold more capital was 'worth a try' but said 'the belief that regulation can ensure that speculative activities do not result in failures is a delusion.'

He said in the past that banks knew that if they grew too big to fail and things went wrong, the government would always stand behind them.

'Incentives to manage risk and to increase leverage were distorted by the implicit support or guarantee provided by government to creditors of banks that were seen as “too important to fail”,' he told business groups in Scotland last night

He said this meant bankers had less reason to guard against risk, leaving the taxpayer to pick up the pieces.

And the regulation currently being mooted will not change that, he warned.

Instead King wants to see deposit-taking and other less risky aspects of banking split off from more speculative investment banking activities.

He said it is 'hard to see why' taxpayer support could not be limited to retail banking.

And he pointed out that letting the banks grow too big had led to 'a breathtaking' level of support for the banking sector totalling £1 trillion.

Paraphrasing Sir Winston Churchill he said: 'Never has so much money been owed by so few to so many. And, one might add, so far with little real reform.'

'We shall all be paying for the impact of this crisis on the public finances for a generation,' he warned.

Given the massive level of support needed to keep the economy afloat, King also said recovery will be slow.

While he said the UK will return to growth sometime this year he fell short of saying it has already done so.

Most economists expect a modest 0.1-0.2% growth but some believe the economy neither grew nor contracted in the three months to September.

In any case, he said output will remain below its year-ago level for some time.

Later today, the bank will publish the minutes from the last meeting of the Monetary Policy Committee.

There is unlikley to be much new news as the rate-setting committee has already said it will wait until November before making any decision on whether to pump more money into the economy.

citywire.co.uk