Jan 2010:
Mervyn King says that Britain should not rush into wholesale bank reform, because banks still needed to be encouraged to lend.
He told MPs recently that the best way to reform multinational banks was to force them to divide into national subsidiaries that can be shut down in the event of a future failure.
Speaking to the Parliamentary Select Committee that is investigating bank failures, he said: ”It is ... very difficult to handle the failure of institutions that span frontiers, and I think the first step is to have a simple, clear, broad-brush approach to how we break up an international institution that failed and different parts of the globe would take responsibility for different bits of it.
"That’s doable in my view and I think we will make progress in our international meetings in that direction.
“I think that we are likely to see over the next few years a movement in the direction of subsidiaries rather than branches because that makes it a whole lot easier for the national regulators to do their job."
He urged the world's politicians and bank regulators, including President Obama, who last week unilaterally unveiled aggressive proposals for bank reform, to work together to achieve reform. But he said that Britain should not rush into wholesale reform, because banks still needed to be encouraged to lend.
“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. I am optimistic about where it will all go.”
He agreed that reform was needed to ensure that banks would no longer be bailed out by the taxpayer because they were deemed "too big to fail", but he warned that it could take years.
“We do need a safer and more robust system ... that may turn out to be smaller,” Mr King said. “The objective is to create a financial sector that provides the services that the non-financial sector needs.”
Removing the implicit guarantee that banks will be bailed out would take a long time, he said.
“The implicit guarantee, I think, is a very, very difficult thing ... I think even if the Government stood up now and said we’re not going to guarantee the banks, I just don’t think people would believe them in the absence of any radical reform to the structure ... and that won’t happen quickly.”
He also resisted any temptation to attack bankers or their levels of pay or bonuses, saying: "They are besieged on all sides, deluged with proposals and ideas.
"They are under intense pressure to meet shareholder demands."
Return to last page