Radical overhaul of banking sector needed, says King
Share
MERVYN KING, THREE-PRONGED PROPOSAL
Mervyn King, governor of the Bank of England, says he would like to see radical reform in the banking sector so that risk is spread more evenly in future.
Appearing in front of the parliamentary Treasury Committee last week King told MPs there had to be a big change to the liability structure within the banking system.
King argues that reform should move the market away from the present system of implicit guarantees whereby firms think they will always be bailed out.
Citing the example of US federal institutions Fannie Mae and Freddie Mac, King says: “For many years the US Federal Reserve went to great lengths to say - don’t lend to these institutions too cheaply because they don’t have a government guarantee.
“But in the end they had to be bailed out because they were so central and important.”
He adds: “We must design a structure for liabilities in the financial sector so that bailouts are no longer expected.”
King proposes a three-pronged approach to reform - more capital requirements, clearer resolution strategies when companies fail and attending to the structure of the system.
The governor admits that now is not the time to implement new capital rules due to the impact this would have on lending.
But he adds: “The important thing is to make it credible to believe that no institution will be bailed out simply because it’s too complicated to be allowed to go under.”
If you enjoyed this article, sign up here to receive daily email updates from Mortgage Strategy and Follow @mortgagestrat
