King: Radical reform vital to the system

RADICAL reform is needed to create a safer international banking system, Bank of England governor Mervyn King told the Treasury Select Committee yesterday.

Speaking along with his colleagues in front of the committee, which is investigating how future financial crises could be prevented, King warned that a long-term approach needed to be taken to address the very complex questions of regulation and reform. “I think we can take our time on this debate on the long term structure of the system – banks are not rushing out to take on more risks,” King said.

He stressed the need for the UK to work in conjunction with other countries, saying: “It does make sense for countries to find ways of working together to deal with the resolution of those institutions and at an international level there is a lot of activity in trying to think that through.” But when asked whether Britain could act alone, he said it could.

King also addressed the “too big to fail” question that has been dominating the debate since the crisis. He said that Britain “can not be allowed to be kept hostage” by institutions that are “too big to fail.”

King’s vision for the banking system is for a world in which there are “more, probably smaller, banks which specialise in different activities”. He said that the pre-crisis situation where there were only a small number of institutions doing every kind of financial activity was a bit of a recipe for concentrating risks.

Also facing the Treasury Select Committee yesterday was Bank deputy governor Paul Tucker. Tucker agreed with King, saying: “We have to make them [banks] less leveraged and more liquid to make them safer. They may over time have to become small in order to be resolvable.”

Tucker also emphasised that reforms could only occur over the long-term. “It’s going to be a long endeavour quite frankly to get a structure of a banking system that puts wholesale creditors at risk without them fearing the system and damaging the recovery and the economy in the meantime.”

The long-term nature of the envisaged reform is expected to have eased institutions’ fears that US President Obama’s proposals could spread to the UK. However, King praised Obama in bringing reform to the table as well as saying that there was much more support for a levy than for so-called “Tobin Tax” – a global tax on financial transactions.