MERVYN KING: BANKS SHOULD BE BROKEN UP
BANK of England governor Mervyn King last night called for banks to be split up to ensure that no institution is “too important to fail”.
Banks should be carved up into utility companies that serve the retail market and separate institutions that take part in riskier activities such as proprietary trading, he said in a speech to businessmen in Edinburgh.
The comments are sure to put him at odds with the Treasury and City watchdog the FSA, which both oppose a British version of the now-defunct Glass-Stegall act that separated retail and investment banking in the US.
He warned that tougher regulation alone would not prevent another financial crisis in the future, adding the UK will be paying for the impact of the financial crisis on its public finances “for a generation”.
A belief that banks were “too important to fail” had led institutions to take risks, confident that if things went wrong “the government would always stand behind them”, Mr King added.
It was essential “to find a way that institutions can fail without imposing unacceptable costs on the rest of society”, he said.
The sheer scale of support to the banking system was “breathtaking” and has created “possibly the biggest moral hazard in history”, he added.
King paraphrased the wartime leader Sir Winston Churchill as he referred to the almost £1 trillion spent to bail out the banks.
“Never in the field of financial endeavour has so much money been owed by so few to so many,” he said.
King said it was likely the economy had returned to “modest” growth during the second half of the year and indicated interest rates were set to remain low.
While inflation could pick up in coming months – due to higher petrol prices, the weak pound and an imminent rise in VAT – weaker spending in the economy was “pulling down on inflation and will continue to do so until spending recovers”, he said.
“If our response to the crisis focuses only on the symptoms rather than the underlying causes of the crisis, then we shall bequeath to future generations a serious risk of another crisis even worse than the one we have experienced,” he warned.