Overhaul banking system, says BoE

The Bank of England is calling for an overhaul of the banking system in light of the liquidity crisis.

Paul Tucker, head of markets at the BoE, has called for a revamped regulatory approach to banking that reflects the global nature of modern markets. He also suggests there should be a gradual reduction in interest rates.

Tucker says: “We must consider all the options when it comes to addressing the liquidity crisis but there are some formidable obstacles in our way.”

Meanwhile, in a speech at the Bank of Israel last week, Mervyn King, governor of the BoE, emphasised the importance of central banks.

He says: “Central banks are at the heart of efforts to restore confidence in the banking system through the provision of liquidity against assets which have proved to be illiquid.

“In the long term it seems likely that banks and ‘near banks’ – institutions that have been regarded as similar to banks in terms of their eligibility for fi-nancial assistance – will be called upon to hold more capital and a greater proportion of liquid assets than has been the case until now.”

King adds: “It’s too early to determine what the long-term policy direction will be but some serious thinking and a willingness to consider radical change will be necessary.”

The comments from the BoE echo those of Henry Paulson, secretary of the US Treasury, who is proposing a radical overhaul of the the US mortgage market.

In a document entitled Blueprint for regulatory reform, Paulson recommends that the Federal Reserve should regulate the US mortgage market.

He also proposes the creation of a mortgage origination commission to set standards for the personal conduct of individuals associated with mortgage origination.

It would also focus on practitioners’ disciplinary histories and look at professional education and testing.

Paulson believes the proposed commission would be able to provide expanded access to credit while protecting consumers from predatory and deceptive lending practices.