King Opens Rift With Brown on Whether to Split Banks
Bank of England Governor Mervyn King opened a rift with Prime Minister Gordon Brown’s government by signaling the biggest banks could be broken up to prevent taxpayers having to shoulder the cost of future bailouts.
King’s suggestion to separate investment banks from operations that take deposits from consumers and manage payment systems was ruled out by Chancellor of the Exchequer Alistair Darling as recently as yesterday.
“It’s clear King’s not happy with where we are now,” said Colin Ellis, an economist at Daiwa Securities SMBC and a former central bank official. “He said the regulatory structure was inadequate, and coming from the governor of the Bank of England that’s as damming as it could be. He’s saying something and advocating something the Treasury has decided not to do.”
It’s the second time in seven months that King has broken ranks with the government and sought to publicly discuss the direction of policy. King in March said Brown needed to tackle the budget deficit with greater urgency, a policy that has since become the centerpiece of the Conservative opposition’s agenda.
The Conservatives, who lead in U.K. opinion polls less than a year before the next election, embraced King’s remarks without saying how they’d rein in banks that are too big to fail. They have pledged to move financial regulation powers from the Financial Services Authority to the Bank of England if they win power and form the next government.
King ‘Persuasive’
“His analysis of how the government’s system for regulating banks failed and how there has been ‘little real reform’ since is one I share,” said George Osborne, the opposition lawmaker who speaks on finance, adding that King was “powerful and persuasive.”
King’s comments were meant to catalyze a debate within the Group of 20 nations about how to rein in banks that triggered the credit crisis, resulting in $2.4 trillion of credit losses and writedowns in the U.S., U.K. and Europe.
Britain’s four biggest banks — Royal Bank of Scotland Group Plc, Lloyds Banking Group Plc, HBSC Holdings Plc and Barclays Plc — have the most at stake. Their lobby group is resisting talk about dividing the industry.
“The key issue is not one of breaking up banks but of financing the economy,” Angela Knight, chief executive officer of the British Bankers’ Association, said in an e-mail. “Big businesses may want big banks which offer a range of products and services while individuals may look to something smaller. Large universal banks are the way forward.”
G-20 Talks
The G-20, whose finance chiefs meet in two weeks for talks in Darling’s native Scotland, is focusing on pushing banks to raise capital and restrain pay rather than devising an international approach to curbing the size of banks. Darling is writing laws to make banks write a “living will” that enables a quick wind-down of institutions that fail.
“We’ve got to make sure that whatever we do, we do it that looks after the taxpayer interest here, that we have a strong and stable banking system, but also that action is taken in other parts of the world,” Darling said in response to a question on the issue after a speech in London today payday loans no fax.
Former Federal Reserve Chairman Paul Volcker and Nobel laureate Joseph Stiglitz are among those urging governments to curtail the size of banks or risk future crises. Barclays Chairman Marcus Agius told the Financial Times that restraining the banks would drive up credit costs and hurt the recovery.
‘Capital Will Walk’
“If the banks are overregulated and returns are regulated out then the capital will walk,” said Mike Trippitt, a London- based banking analyst at Oriel Securities Ltd. The ongoing debate over regulations are “muddying the water in terms of the investment decision,” he said.
King said yesterday that, while global efforts to bail out banks had prevented economic disaster, they had created “possibly the biggest moral hazard in history.” He said that it is “hard to see why” proposals such as those made by Volcker to separate proprietary trading from retail banking are “impractical.”
“What does seem impractical are the current arrangements,” King said. “Anyone who proposed giving government guarantees to retail depositors and other creditors and then suggested that such funding could be used to finance highly risky and speculative activities would be thought rather unworldly. But that is where we are now.”
Government Position
Brown, Darling and other ministers have repeatedly said such a split would have failed to prevent the collapse of Lehman Brothers Holdings Inc. or Northern Rock Plc.
“The difference between having a retail and investment bank is not the cause of the problem, the cause of the problem is that banking has not been sufficiently regulated,” Brown told lawmakers in London today.
“You regulate according to risk,” Darling said yesterday before King’s speech. “The greater the risk, the greater the capital requirement. I don’t think an arbitrary split would deal with the problem.”
Treasury Minister Paul Myners today dismissed suggestions of a rift with the central bank, saying legislation mapped out in July already makes provision for altering an institution’s structure to split its deposits from its investing operations.
“The governor and the government are in agreement,” Myners told BBC Television today.
Simon Lewis, a spokesman for Brown, said: “The governor of the Bank of England set out some interesting thoughts. That is fine. The most important thing is that we move forward so that we are protected for failures in the banking system.”
King’s comments carry additional weight because the Treasury is beefing up the Bank of England’s role in overseeing stability of the economy.
“The governor made the point in his speech last night that there are no simple answers to how you deal with banks that are large and complex,” Darling said today. “You cannot have a regulatory regime that excludes the risk of failure.”