Too big to fail, or just too big?
24 Jun 09
While the Government is keeping quiet so far about what comes next in banking reform, the Bank of England and Financial Services Authority are stirring up a debate about it
The Bank of England and the Financial Services Authority appear to be taking different positions in the debate over how banks should be regulated in future.
It already appears inevitable that more powers will be restored to the Bank of England to overseen individual banks, as well as keeping an eye on the health of the market as a whole. The tripartite system of responsibilities divided between the Bank of England, the FSA and HM Treasury has been tested and found wanting, so change is coming, either under this government or the next.
It seems that FSA chairman Adair Turner has already accepted as much – he apparently told MPs at the Treasury Select Committee this week that he was “agnostic” about such a change.
However, Turner and Mervyn King, governor of the Bank of England still appear to disagree over whether reforming regulation also means restructuring the banking sector. In his speech at London’s Mansion House last week, King indicated that if banks have become “too big to fail” that is a structural problem that will have to be addressed, perhaps by instituting some sort of division or break-up. A number of commentators have suggested separating out the “casino” elements – risk-taking investment banking arms – from deposit-taking banks on which the bread and butter economy depends
Adair Turner, on the other hand, has described, “achieving a hard and fast legal divide between narrow banking and investment banking” as “not a reasonable way forward.”
Turner told MPs at the Treasury Committee: “I am… significantly attracted to ideas in [U.S. Treasury Secretary] Geithner's proposals that we should think about not an absolute limit on size, that would be very difficult to achieve, but a sliding scale of capital requirements which simply require higher capital requirements from large banks or from banks involved to a greater extent in risky trading…it's a tax on size.”
Debate is good, and it’s important that it carries on the reform momentum before the banking establishment manages to convince government that everything is all right again and that “business as usual” will prevail.
Next week, we are told, the Treasury’s proposals on banking regulation will be published. What concerns me is that what’s put on the table will not measure up to the scale of the economic catastrophe that has been caused, in large part, by unsafe and short-termist banking practices. This is no time for half-measures.