Banks pose biggest moral crisis in history, says King
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Mervyn King, governor of the Bank of England has hit out at the massive support extended to the banking sector around the world, calling it the “biggest moral hazard in history.”
Speaking to Scottish business organisations in Edinburgh last night, King says the “too important to fail” problem is too important to ignore.
He says there are only two ways in which the problem can - in logic - be solved. One is to accept that some institutions are “too important to fail” and try to ensure that the probability of those institutions failing, and hence of the need for taxpayer support, is extremely low.
The other is to find a way that institutions can fail without imposing unacceptable costs on the rest of society. Any solution must fall into one of those two categories. What does this mean in practice?
He says: “The sheer scale of support to the banking sector is breathtaking. In the UK, in the form of direct or guaranteed loans and equity investment, it is not far short of a trillion (that is, one thousand billion) pounds, close to two-thirds of the annual output of the entire economy.
“To paraphrase a great wartime leader, never in the field of financial endeavour has so much money been owed by so few to so many. And, one might add, so far with little real reform.”
He says it is hard to see how the existence of institutions that are “too important to fail” is consistent with their being in the private sector.
He adds: “Encouraging banks to take risks that result in large dividend and remuneration payouts when things go well, and losses for taxpayers when they don’t, distorts the allocation of resources and management of risk.”
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Readers' comments (3)
Anonymous | 21 Oct 2009 11:36 am
It is difficult to disagree with Mr King's analysis. The only logical answer is to nationalise all UK banks that are deemed to big to fail to ensure that all future dividends come back to the tax payers pot.
Once global capital is back in abundance then look at selling some of the nationalised assets.
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Alan Townley | 21 Oct 2009 5:12 pm
fantastic!! A big Hurrah for commonsense!
nationalise the lot of them and lets get on with the important things in life!
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Glen McKeown | 21 Oct 2009 6:55 pm
In this instance Mervyn King is talking sense. A significant part of the current problem is that institutions are so big there is little competition. There is in effect an implicit cartel in place.
What is disappointing is that for many years people were saying that a crisis was in the making, and no-one had any idea of how to deal with it. Now everyone knows how to deal with it - but we've yet to see any evidence of anything practical.
Is William Hill taking any bets on the authorities still talking about solutions in two years time?
And in the meantime the FSA is concentrating its entire resources on Self Cert mortgagees - just to prove it can do something!
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