Banks could be forced to hold several times more capital than Basel III in its current form re-quires them to.
Mervyn King, governor of the Bank of England, has suggested a radical shake-up of the banking system and says Basel III require-ments do not go far enough in preventing another financial crisis.
Under Basle III banks will be required to hold a minimum core Tier 1 capital ratio of 7%, up from the current 2% by 2012.
Speaking in New York last week, King told the audience: “One simple solution, advocated by my colleague David Miles, would be to move to much higher levels of capital requirements – several orders of magnitude higher.”
He also put forward the case for limited purpose banking, which would mean banks need to hold 100% of all deposits made and become mutual funds.
Under limited purpose banking, banks would never hold any finan-cial assets and they’d never borrow except to finance their mutual fund operations.
King says: “That would ensure each pool of investments made by a bank is turned into a mutual fund with no maturity mismatch. There is no possibility of alchemy. It is an idea worthy of further study.”
He also suggests another avenue of reform could be some form of func-tional separation, detaching the riskier business from the retail side.
But Tony Ward, chief executive at Home Funding,says it is never going to make banks bomb-proof.
He says: “It’s sensible to try to make banks bomb-proof, but not realistic. Making them hold more capital would cause too much damage.
Banks are not lending as much as they should be and forcing them to hold more capital will deter them further.”