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King calls for a debate on liability reform in the banking sector

Mervyn King, governor of the Bank of England, is pressing for what he calls a fundamental debate on reform of the banking sector that spreads liabilities but protects the financial system.

King recently appeared in front of the parliamentary Treasury Committee flanked by deputy governor Paul Tucker and Andy Haldane, executive director of finan- cial stability at the Bank.

Answering MPs’ questions on whether some financial institutions are too big to fail King hammered home the message that an urgent debate is needed on the structure of the banking system.

King told the committee that the Bank is prepared to consider radical reform to ensure wholesale creditors accept risk but are also protected from threats to the stability of the system.

He says what is needed is a fundamental change in the liability structure of the system but emphasises that this will not come about overnight.

King argues that it is important to get away from a system which has implicit guarantees for banks and where firms think they will always be bailed out, citing the example of US federal institutions Fannie Mae and Freddie Mac.

He says: “For years the Federal Reserve went to great lengths to say – don’t lend to these institutions too cheaply because they don’t have government guarantees. But in the end they got bailed out because they were important.

“We need to design a structure for liabilities in the financial sector in such a way that bailouts are no longer expected.”

King outlines a three-pronged proposal which he believes is central to banking reform.

This is based on higher capital requirements, clearer strategies for resolution when firms fail and the issue of structure.

He says structure is where President Obama’s proposals come in, including the breaking up of larger US banks and limits on proprietary trading whereby banks contribute their own money towards investments.

Tucker told MPs that he believes in what he calls the spirit of President Obama’s plans when it comes to curbing risky trading but says such proposals are only part of the solution.

King adds: “We have got ourselves into a difficult position whereby the structure of the financial sector is one in which increasingly big and costly bailouts follow one another.”

Haldane revealed to MPs that the size of the banking sector relative to GDP is 500%, adding that this figure is at the upper end of the international league table.
Gross mortgage lending increased to £10.2bn in December

Lending strengthened in December 2009, with gross mortgage lending rising to £10.2bn – up from £9.6bn in November. Figures from the British Bankers’ Association also show gross mortgage lending rose 12.5% compared with December 2008.

The BBA attributes the rise to consumers wanting to snap up properties before the end of the Stamp Duty holiday in January.

Net mortgage lending stood at £3.5bn in December, up from £3.4bn the previous month and representing an annual growth of 4.6%.

Overall mortgage approvals in 2009 were 980,000. This was some 27% lower than 2008 and the lowest since BBA data became available in September 1997.

Remortgaging was 20% down on 2008, which the BBA blames on borrowers moving onto lenders’ SVRs.

David Dooks, statistics director at the BBA, says: “High street banks continued to lend substantial amounts in the weak mortgage market of 2009, approving more than 440,000 loans for house purchase.”

 

 

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