King calls for root-and-branch banking reform
By Peter Wozniak
The governor of the Bank of England, Mervyn King, has indicated that current plans to reform the banking system do not go nearly far enough.
In a speech in New York, Mr King told the audience of economists that the foundation of banking must shift from short-term debt to “much, much more equity”.
Currently, under new rules banks have to hold an equity ratio of seven per cent of their assets in order to absorb shocks from losses. Mr King believes the rules have to go far further.
Positioning himself at the radical end of calls for banking reform, Mr King called for an end to the system which sees some banks being seen as ‘too big to fail’.
He argued: “What we cannot countenance is a continuation of the system in which bank executives trade and take risks on their own account, and yet those who finance them are protected from loss by the implicit taxpayer guarantees.
“Of all the many ways of organising banking, the worst is the one we have today.”
Most politicians agree with the need for reform, given the popular climate for ‘banker-bashing’, but the proposals so far have been limited.
The government has introduced a levy of £2.5 billion on banks with a view to making it permanent.
The levy has been criticised as being wholly insignificant in curbing banks risky behaviour.
It is a criticism apparently shared by Mr King, who said: “Although there is a sound case for a levy directed at the size of short-term borrowing, it would be foolish to regard that as the main tool to align costs and benefits of risky balance sheet activity.”
The governor did however have praise for the independent commission on banks set to make recommendations to the government next year, but he expressed hopes that it might call for radical measures.
Mr King added his support to Vince Cable’s calls for a separation of retail and investment banking when he said: “If there is a need for genuinely safe deposits the only way they can be provided, while ensuring costs and benefits are fully aligned, is to insist such deposits do not coexist with risky assets.
“This crisis has already left a legacy of debt to the next generation. We must not leave them the legacy of a fragile banking system too.”
