Banks should be broken up, Bank of England Governor Mervyn King warns

Mervyn King, Governor of the Bank of England, has thrown his weight behind breaking up the banks as part of wider reforms to protect the taxpayer from another financial industry meltdown.

Mervyn King: Reuters image

Philip Aldrich
Telegraph

In a speech to the Buttonwood Gathering in New York, he set out his vision for a banking industry that does not imperil the next generation. He warned creditors that “they will bear losses in the event of failure” and stressed that banks in the future must be “financed much more heavily by equity rather than short-term debt”.

Addressing the option of separating investment banking from retail banking, 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.”

He said such a radical measure “explicitly recognises that the pretence that risk-free deposits can be supported by risky assets is alchemy” and argued that a simple break-up would make it harder for banks to work around the rules.

“The attraction of the more radical solutions is that they offer the hope of avoiding the seemingly inevitable drift to ever more complex and costly regulation,” he said. “The advantage of these types of more fundamental proposals is that no tax or capital requirement needs to be calibrated.”

Banks are already facing the toughest regulatory overhaul in years with the capital and liquidity buffers being introduced under Basel III. However, Mr King said Basel is only the start as “even the new levels of capital are insufficient to prevent another crisis”. The Goverment’s £2.5bn bank levy is also “not a silver bullet”, he said: “In the area of financial stability, it makes sense to have both belt and braces.”

Banks have attacked new regulations and taxes for lumbering the industry with such high costs economic growth will suffer, claiming that as many as 10m fewer jobs will be created over five years as a result. Mr King dismissed the argument, saying: “The benefits to society, most obviously through greater financial stability, but also through factors such as higher tax revenue, are likely to swamp any change in the private costs faced by banks.”

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