Sunday, February 28, 2010

Mervyn King: UK must face up to the dangers in banking

The Governor of the Bank of England has warned that the UK needs to "face up" to the dangers within the financial system and adapt radical reforms – or risk an "even bigger crisis next time."

Mervyn King told a cross-party commission that it is a "false paradise" to call deposits "safe" in banks that are "investing in risky assets." Mr King said the "heart of the problem is the inherent riskiness in the structure of the banking system."

The Future of Banking Commission, whose members include David Davis the former shadow home secretary, Vince Cable, the shadow Chancellor for the Liberal Democrats, and John McFall, the chairman of the Treasury Select Committee, aims to publish after the election recommendations for long-term reforms.

Mr King warned that only radical restructuring would be sufficient: "Don't pretend that regulators can stop banks taking risks that will one day turn out to be serious," he said.

Instead he urged the Commission push for the creation of "narrow banks" in which retail deposits would be "ring-fenced and protected" from investment banking activities.

Under a new structure, Mr King said regulators "wouldn't need to worry" if other parts of banking were "socially useless". Mr King said: "If people want to pay money for those sorts of services, let them", because with "firewalls and firebreaks protecting the bits of banks you really care about", it wouldn't matter if other parts failed.

Mr King said that there was an increasingly international appetite for the reforms. But he added: "My fear would be that we will have this debate, and not very much will happen, a sort of Basel III. But this won't actually prevent the next crisis, [and] the next crisis will be even bigger. "

Although Mr King said an international agreement would be "desirable" he warned that Britain needed a resolution because of its position as global financial centre and the relative size of the sector. He said: "Our ability to maintain our reputation lies in demonstrating to the rest of the world and ourselves that City does not ultimately depend on the tax-payer." If it cannot, he said, "we will simply have to reduce the size of the system."

Giving evidence after the Governor, Sir Brian Pitman, former chairman of Lloyds TSB, told the Commission that bank incentives needed to be attached to the long-term of as much as 10 years. He said: "When I was chairman of Next, we couldn't get up in the morning and say we're going to expand the business, let's vastly expand the risk profile. But you can in banks." He warned that short term incentives would radically increase the appetite for risks in banks.

Jane Anne Gadhia, chief executive of Virgin Money, said that new entrants into retail banking would not be able to offer free current accounts and called for the costs of banking to be more transparent. TRADING INFO
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