In a hard-hitting speech in Edinburgh last night, Bank of England Governor Mervyn King declared that regulation alone will be insufficient to stabilise the UK’s financial system – the way that banks themselves are structured will have to change, too. Judging by the fact that those very banks are preparing to pay out bumper bonuses of £6bn, while the rest of the country still languishes in recession, he may have a point.
Abandoning the tradition that central bankers should be measured and uncontroversial in public, King nailed his colours to the mast, making his clearest call yet for banks to be broken up. ‘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 so little sign of reform’ he declared.
His comments are unlikely to endear him to many City professionals, but they may well resonate with others in business – especially as economics think tank the CEBR is predicting that bankers’ bonuses this year will rise by a whopping £2bn to £6bn.
This at a time when unemployment still rising and the rest of the commercial world is still struggling with the effects of the downturn. Not only that, but – and this is what really seems to stick in the public craw - many of the banks preparing to pay those bonuses only remain extant because of vast government bailouts. Those financial types certainly don’t lack front.
At the very least, this shows a spectacular lack of tact and understanding of the public mood on the part of the sector. Even if you don’t share the popular opinion that we’ve all been taken for a ride by a bunch of pinstriped cowboys, it’s hard not to agree with King that something needs to be done.
King didn’t spare the government’s blushes either, calling the £1tn of public support for the banks ‘breathtaking’ and ‘not sustainable’. Also hard to disagree with in the week when government borrowing for the six months to September hit its highest-ever figure for the period of £77.3bn. Total national debt is now heading for £850bn, almost 60% of GDP. That will take a generation to pay off, if it doesn’t bankrupt us first.
Merv seems to favour the narrow banking approach, where the ‘utility’ operations – retail banking, credit, payment processing – are split from the more lucrative but much more risky speculative trading operations. Under this model, the traders are not able to speculate with the retail customers’ money, only with funds deposited specifically for that purpose. So if the traders get into trouble, they can fail without threatening the utility system that underpins the regular financial system.
That’s the theory anyway, although many bankers don’t like it because they believe – not without reason – that it would seriously damage Britain’s competitiveness in the financial markets. But King thinks the alternative – increasingly draconian, complicated and restrictive regulation – would be even worse.
This is a tricky problem that urgently needs solving. Successful banks are vital to our recovery prospects, but if we let the industry simply carry on as it did before the taxpayer may be asked to foot the bailout bill again in a few years time. And if the last 18 months has taught us anything, it’s that we simply cannot afford to do that.
In today's bulletin:
Gatwick prepares for take-off with new owners
Mervyn King calls for reform as bankers set for £6bn payout
Sweet sales up as Cadbury insists it knows its Kraft
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